China will likely manage a soft landing in 2012. But economic imbalances in the Year of the Dragon will challenge the Chinese Communist Party.
In the Chinese Zodiac, China is now entering the Year of the Water Dragon, marking a year of transition, uncertainty and change.
The Year of the Dragon is indeed set to be a critical year for political change in China – at the very highest levels of the national government. This autumn, the 18th National Congress of the Communist Party will elect the new Central Committee and Politburo Standing Committee members.
Current President Hu Jintao and Premier Wen Jiabao are due to step down from the Standing Committee to make way for the new generation of leaders, from amongst whom the new Chinese president and premier will be appointed in March 2013.
In the Year of the Dragon, China – which is now the world's second largest economy – is also facing considerable economic uncertainty. There’s clear evidence that Chinese economic growth momentum has moderated during the second half of 2011. The eurozone, still a major market for Chinese exports, is already sliding into recession, while the momentum of U.S. economic recovery, although encouraging in recent months, remains moderate at best.
Latest GDP growth data released for Q4 2011 showed that Chinese GDP growth had moderated to a pace of 8.9 percent year-on-year, the slowest in ten quarters. This reflects various factors, including weakening EU demand for Chinese exports, as well as the impact of significantly tighter monetary policy in order to curb inflation pressures.
There are signs that the Chinese government’s monetary policy tightening in 2011 has been successful in curbing inflation, with the year-on-year CPI inflation rate slowing from 6.5 percent in July 2011 to 4.1 percent by December.
However, the recent growth slowdown has heightened concerns about whether the Chinese government can successfully engineer a Goldilocks scenario – a “not too hot, not too cold” – of moderate inflation and a soft landing for the economy, or if China will face a hard landing with growth slowing sharply.
IHS Global Insight's central case forecast for the Chinese economy in 2012 is for a soft landing, with GDP growth moderating from 9.2 percent in 2011 to 7.9 percent in 2012. This forecast is based on the central case scenario for the world economy, which assumes the eurozone will only have a mild recession in 2012, with eurozone GDP declining by 0.7 percent, while the United States is forecast to have positive growth of +2.0 percent.
A number of factors are expected to support the resilience of Chinese economic growth in 2012.
First, although Chinese exports to the EU are clearly slowing rapidly, overall Chinese export growth is still positive. In December 2011, Chinese exports were up 13.4 percent on a year ago, despite weaker EU orders, since the U.S. market has remained stable while exports to the rest of Asia and other emerging markets has continued to grow strongly.
Second, domestic demand measures still show considerable momentum, with December industrial production up 12.8 percent on a year ago, while nominal retail sales were up 18.1 percent on a year earlier.
Photo Credit: Flickr / Peter
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Michael
Any article of China written by an Indian arthur needs to be taken with a BUCKET OF SALT! China is the future market whereas India is the future….and that’s all it will ever be!!!
Girish
@Micheal
“Any article of China written by Indian arthur needs to be taken with a BUCKET OF SALT”
Well, could be, but I suggest that you don’t make it a policy in your life as that will be a foolish decision.
John Chan
One American fund manager said the amount of people China wants to urbanize will produce 8% of growth a year without improving in productivity. Any growth less than 8% to China is in recession in essence. 9-10% growth to China is just it is doing bare minimum. There is a long way to go for China’s growth at above 8%.
Liang1a
John Chan wrote:
January 24, 2012 at 8:09 am
One American fund manager said the amount of people China wants to urbanize will produce 8% of growth a year without improving in productivity. Any growth less than 8% to China is in recession in essence. 9-10% growth to China is just it is doing bare minimum. There is a long way to go for China’s growth at above 8%.
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Liang’s comment:
Which fund is this? And what did he say exactly? Can you give us a link to that article or articles?
It is nonsense to say that urbanizing the Chinese people will not increase their productivity. This is possible only if they are employed in the exports industries without producing more outputs than they were producing as rural residents. But if the urbanization is based on increasing the productivity of the urbanized farmers to produce goods and services for themselves to consume then they can become as productive as the Americans by using the same efficient tools and machines as the Americans are using and so deserve the same high incomes as the Americans.
If China’s GDP growth in real PPP terms can maintain 8% a year then it will be 800% in 30 years. It is only possible for China to grow 8% a year without improving productivity if inflation incrased 8% a year. Anyway, people should be careful of the real purchasing power parity value of money and the nominal value of money. Nominal value of money can increase many times without increasing purchasing power if productivity stays the same while inflation increased many times. And if productivity increased then purchasing power will go up even if incomes stays the same.
In the end, it is productivity that allows higher purchasing power to increase the standard of living of the people. Urbanizing the farmers without increasing their productivity is pointless. Fortunately, urbanizing the farmers will inevitably increase their productivity.
To read more about this subject, please go to the following link:
http://www.network54.com/Forum/238054/thread/1277846989/last-1277846989/The+Face+of+China’s+Economic+Engine
John Chan
@Liang1a,
It was on the Bloomberg radio. He was very bullish on China because just by urbanizing, China would produce 8% of growth a year without improving in productivity, when including productivity, the growth would be more.
There is nothing negative in his tone; it is puzzling why you are calling his comment nonsense.
Liang1a
John Chan wrote:
January 25, 2012 at 12:37 pm
@Liang1a,
It was on the Bloomberg radio. He was very bullish on China because just by urbanizing, China would produce 8% of growth a year without improving in productivity, when including productivity, the growth would be more.
There is nothing negative in his tone; it is puzzling why you are calling his comment nonsense.
——————————-
Liang’s response:
As I said before the most important thing is increasing productivity and the increased productivity should result in more output of goods and services for the consumption of the Chinese people. If the productivity doesn’t increase then there is no gain in output. That is, there will be no increase in goods and services for the Chinese consumers. And if the GDP grows 8% without any increases in productivity then there must be 8% of inflation. It frustrates me to see people totally misunderstand the significance and purpose of the urbanization. The point is not GDP growth in terms of amount of nominal yuan. The point is in the increases of actual real output of goods and services which can only be possible through increases of productivity.
Bringing the rural farmers into the urban areas without increasing their productivity will end in total disaster. That is why I’m so upset and call his comments nonsense. This is malicious compliance with my guideline of urbanization.
Klee
Whatever China’s economy turns out to be, those west journalists, analysts, and critic will present negative comments and dire predictions. For example, when China’s economy was rising at about 10%, they said it was unsustainable, over heated, on trillmead to hell. When it was running at around 8%, they said it would definitely have a hard landing and the economy would collapse and the society would be in chaotic scenes. Regardless what China’s economy behaves, they would always criticize to the bone.
In reality, they want and pray for China to collapse and US to rise. But in reality, US with its 15+ trillion-dollar debt, they will not be able to balance their budget for at least another 30 years even they do it right, because US has been too indulgence to pour money into their defense budget to maintain world dominance and hegemony and contain China.
In fact, China should surpass US in GDP output around 2030. But it probably takes more decades before China can get in par or surpass US’s military strength.
Jack
Wait a minute, so all the China hype going on in the western world for the last 10 years has been nothing but an elaborate inside joke? Wow, I must be oblivious. I recall that during my junior year in high school, this was in 2005, I had to write a thesis paper as a graduation requirement, and I chose China as a topic. There were literally hundreds of articles touting China as a hotbed of long-term growth, a fantastic investment opportunity, an so on. When I tried to get a differing perspective, I got a handful of poorly made geocities sites with very low annual traffic. I don’t know where you grew up, but here in the United States predictions of a Chinese collapse were far from mainstream views for a very long time. However, I think that you are simply stabbing in the dark because of your kneejerk anti-American compulsions.
Just for the record, our budget issue is not a result of military spending, a 10 second google search will reveal that our entitlement spending on programs like Social Security and Medicare/Medicaid soak up nearly 60% of our budget, and that still doesn’t account for the hundreds of billions wasted in public works stimulus spending and bailouts since 2008.
Liang1a
The truth is China has already equalled America in GDP. China’s GDP in terms of yuan is some 47.2 trillion yuan in 2011. If the exchange rate is still 8.27 yuan per dollar as in 2005, then China’s GDP will be $5.7 trillion. But at the current exchange rate of 6.33 yuan per dollar today, it is $7.46 trillion. And if it is at 3 yuan per dollar of PPP value then it is $15.73 trillion or bigger than the American GDP of $15.17 trillion. Therefore, how big China’s nominal GDP is depends on the exchange rate. Since the exchange rate can be manipulated it is not reliable and practically meaningless. What is meaningful is the PPP GDP which measures the actual purchasing power of the domestic currency in the domestic market to give people the actual standard of living they enjoy.
The nominal GDP which depends on the current exchange rate is meaningful only if a country needs to import a lot of critically necessary things. For example, if India wants to import 100 of Russian T-50 stealth fighters then it must have dollars. In which case its GDP must be measured in nominal terms. For example, if Indian economy is $1.8 trillion in nominal terms and it needs to spend $6 billion to buy 100 Russian T-50 stealth fighters then it will cost India 0.33 of its nominal GDP. But China since it can produce all its fighters, its cost of fighter production can be measured in PPP terms. Therefore, if it cost China 200 million yuan to produce 1 J-20 then 100 J-20 will cost 20 billion yuan or 0.11% of China’s PPP GDP. So China can afford to deploy 3 times more stealth fighters than India. Of course by 2020 China’s economy would have doubled in real terms and could effectively double the output of its stealth fighters while India’s economy being dependent on exports or out-sourcing will remain stagnant.
Godfree
”Laws” that govern our finances don’t govern China’s, for many reasons. To list a few:
1. China’s currency is entirely under its own control.
2. Reserves of foreign currencies are plentiful and growing.
3. Its sovereign debt, at 40% of GDP, is one of the lowest on earth.
4. Their slowdown, unlike ours, was intended and planned.
5. China’s government doesn’t just control the strategic heights of its economy, it OWNS them: banks, insurance companies, media, etc.
6. Chinese home ownership is 90%. Most homes were purchased for cash, the rest with a minimum 30% deposit. Second and third homes require 60% and 100% cash.
7. Hong Kong has been through many similar real-estate booms and busts. Hong Kong, along with its gifted administrators and their years of experience, is part of China. They are numerate. They talk to Beijing daily.
8. The Chinese economy is growing 7-9% annually. We have no idea of what that is like, or what that momentum can do in a nation of 1.3 billion people. That rising tide will lift most stranded boats. Ships, even. Developers and lenders know this. The Chinese are patient.
9. China is a unified, coherent nation and civilisation. Its government is trusted (Edelman) and admired (Pew) by 86% of the people. They’ll cooperate, willingly, with government policies. They’ll grumble because they’re human but they’ll cooperate because they’re Chinese who, as Kissinger pointed out, “are smarter than us.”
10. If the government says to the banks, “We’ve run some numbers and we think you should extend your CRE loans for another 18 months at interest only”, the banks will extend the CRE loans for another 18 months at interest only. Not just because the government owns controlling interests in the banks, but also because they know that the guys in the CCPCC are really, really smart and honest, and usually get things right.
Aaah! A Capitalist Paradise on earth.
Binky P. Behr
@Godfree
I am very suspicious of the verity of these data points and am of the opinion that they are not to be accepted without very critical appraisal.
James
Binky P. Behr
You mean like America’s national unemployment rate of 9%??? Or India Shining??? LOL
Longshan
Yet another commentator who does not fully understand the smoke and mirrors of the inner workings of China.
1st. You cannot believe anything the CCP publishes in terms of statistics. Inflation during 2011 was headlined around 5-6% yet anyone living in China knows it was nearer 16-18%. In China statistics are about keeping the population feeling good.
2nd. As someone else said, most Provincial and city governments are near or actually technically Bankrupt. To highlight this many companies are, as I write, experiencing acute problems in obtaining payments from anything related to government, which is where the vast majority of Chinese investment comes from. As just one example, the huge and financially lunatic high speed train project has all but ground to a halt. Late last year vast numbers of employees had not been paid for months. This can only get worse as the value of land drops like a stone. Last year the government allowed some Tier one cities and provinces to raise money by selling bonds for the first time in decades (something reminiscent of the west here?).
3rd. The central government admits that 30% of all loans by Provincial governments are and will remain, non performing. In reality this figure is nearer 60-70%. With annual growth in excess of 8% and buoyant land sales China can keep ahead of the curve. Once both these areas of income fall substantially (as they have in recent months) it is likely the whole ponzi scheme that is the Chinese economy will collapse like a pack of cards. This collapse is in the early stages of realisation.
4th. Forex reserves have been fleeing China in the past couple of months, however this aside the government issues Renmimbi against foreign exchange and uses them to invest in local government and thereby the (often non performing)massive infra structure projects; so in reality this money is already spent and the government is actually paying interest! The government’s other taxation reserves of around 1.5 to 2 trillion dollars are, as we know, invested in the USA Europe and elsewhere and are not coming home any time soon.
5th. There is much talk about re-aligning the economy. The two most mentioned strategies are an internal economy and a drive towards innovation and invention. The internal economy can only be realised when more Chinese have sufficient disposable income to become consumers and when there is sufficient social support for them to feel the need to save less. The drive towards the former has already made China uncompetitive within the markets from which it has traditionally exported and the latter is decades from becoming a reality. The Chinese are great at working incredibly hard and making money however there is very little sign of innovation. Chinese media is full of so called innovation, however in reality this is either more advanced copying or development of existing technology that, often, no one else wants to develop. The way Chinese education works leads to a population full of knowledge but with little ability to innovate. Media control has bred an urban population who are seriously class orientated (which adds to the already enormous social tensions), are largely arrogantly divorced from economic reality and who fervently believe that the China is an invincible exception to all economic laws. The inability to face the truth is further seriously inhibited by their cultural concerns with loss of face. Where are the real examples of innovation and invention? Why are so many Chinese students now attending western universities? I accept this type of development may well come about but, if it does, it will be much too late. Now is the time of need!
On top of all this I have not mentioned the endemic corruption, huge vested interests and vast waste that have so much effect on the Chinese economy. I could go on. A soft landing is required by all of us on this planet however the likelihood is fast receding into the sunset!
John Chan
@Longshan,
All you did is outlining the problems exit in China, but those problems have been around for decades, they did not seem to slow down China a bit. All you did is ranting with fabrication facts but no proof of the problems you rant could cause China economy to collapse.
Besides what do mean by collapse? Is financial meltdown in the USA an economy collapse? Or is debt crisis in Europe an economy collapse? But nobody said the economies in the USA and Europe had collapsed, are you saying China’s economy would be worse than the economies in the USA and Europe? But China does not have sub-prime problem and national debt problem as in the USA and Europe.
China has surpassed USA as world largest patent registrant, so what do you mean by “China has very little ability to innovate”? Besides the amount of innovation has little to do with economic prowess, for example USA invented digital camera, cell phone, etc., but the Japanese and S. Korean stole the inventions and made the most money out of the USA inventions.
It seems you do not know anything about the relationship of China’s Forex reserve with its economy. RMB is not a convertible currency, and China does not use USD, China can print money thru thin air just like The Fed, so what mean by China’s Forex reserve is already spent?
If you want to go on commenting, please post something meaningful instead of trolling senselessly.
Larry
“endemic corruption, huge vested interests and vast waste that have so much effect on the Chinese economy”….and the Western societies are a bastion of righteousness and virtue? LOL
Grant
I imagine the writers must have loved the opportunity to throw the word ‘dragon’ in wherever they could. Normally you can only use it once when writing about China.
Reason
For month I’ve been hearing commentators say that “China is immune to a slow down, due to tiered city development, internal consumption and sales into secondary markets.”
Now everyone has picked up a different song sheet and singing the tune that China can manage it’s slow down and complete a soft landing – these pundits have no shame, just months ago they were confidently predicating there was no sign or need for China to slow down
What a joke
The majority of China’s provinces are Greece x10
In China everything is political – So normal rules of economics do not apply. The Chinese economy is an economic disaster – but right now its not a political disaster – the CCP still has a tight control of things.
Here’s a prediction for ya – As 2012 passes, more and more signs that the wheels have fell off the Chinese economy will begin to appear. The Chinese model or economic miracle will clearly show signs of being debunked for what it actually was – an uncontrolled selling of Chinese land, labour and resources at unsustainable levels, at the benefit of only a few elites
The CCP will go into overdrive trying to handle the collapsing economy politically – this will be the story of 2012.
applesauce
what have you been smoking? the majority of economists, especially the good ones would never say that china is immune to a slow down, in fact slow downs have happened in the past and will show up in the future too. and current predictions for a soft landing are fairly good and this is a very short term prediction, the data supports it with no obvious signs of a imminent crash.
“The majority of China’s provinces are Greece x10″
author already countered this, even all local borrowing added up in addition to national debt the debt-to-GDP ratio is still ~50% and with 3 trillion in foreign reserves to back it up there is no signs of a financial crisis in the Greece style.
And the so called “economic disaster” is growing at 9.2% this year with a forecast of 7.9% in 2012 in addition to 3+ trillion in foreign reserves and all pointers showing continued ~8% growth in the foreseeable decade to come. Like i said what have you been smoking?
John Chan
Foreign reserve is for balance payment of international trade. Unless national and provincial debts are issued in foreign currency, the debts has nothing to do with foreign reserve; China government debts are in RMB, China can print RMB thru the thin air to pay interest on those debts and buy back those debts, it is same as what the Fed is doing. Japan has highest debt-to-GDP ratio in the world, but Japan borrows from its own people and has a lot foreign reserve so it does not debt crisis.
yang zi
@reason, until you realize that British was a drug trafficker during opium
War, your analsys about China is always questionable. You are smart and love to read, you can make a top thinker in an Indian think tank, but your analysis is just not reasonalble at all.
Reason
@Yang zi
Haha…. nice!
Britons were certainly running opium – just like the communists were in Yan’nan. It was certainly a means to an end for both and helped fund their legitimate practices in China.
But Britain never fought a war over opium in China – The CCP can twist the history as much as it wants.
and regarding the the Chinese economy – These figures everyone quotes – come from the same banks and indexes that couldn’t even predict the US collapse – yeah – they’re trustworthy
JohnX
yang zi wrote: “@reason, until you realize that British was a drug trafficker during opium War, your analsys about China is always questionable.”
So was China in terms of distribution. The British purchased it and sold it in bulk in China, but there weren’t that many involved in the sale of it at the local level.
The opium war as you say it, had more to do with trade and the forcing open of trade routes into China than the drug itself. Plus, there was no real knowledge of the dangers of the drug that we know today.
They just saw it as a strong selling product (this in no way justifies thier sale of it) but you must understand that there were many British using it as well at the time and ignorant of its dangers. They just saw China as a massive market, just like they do today.
Look at the tabacco companies and petrol car manufacturers today, thier products have negative impacts but they see just the almighty dollar. It was an imperialistic attitude and one that still exists today in some form even by China.
Chinese military leaders have stated that they will use military force to protect thier economic interests and some of those interests exist in other countries.
What would China do if they were in a strong position militarily and other nations decided to stop accepting Chinese goods or selling them raw materials.
Is it truly impossible to believe that China wouldn’t force the markets open just like the British did 150 years ago?
Belinda
I think someone has been watching a little too much FOX NEWS and NASCAR!