Thursday, May 14, 2009

Economic Outlook

I saw news today on the rise of China's consumer spending and the decline of it industrial output.

At this point, I'm used to this conflicting kind of news from China. But how to interpret such headlines, and general opposing news trends coming out of China, is a very difficult task.

I found two compelling articles today that I'll post on here. One laying out why China and other Asian "tiger economies" are poised for recovery. Another arguing that China's bubble economy will not be immune to a worldwide downturn.

The first, more positive article, from The Economist:

Asia's tiger economies have suffered some of the sharpest declines in output during the global recession, and some fear that, because of their dependence on exports, they will not see a sustained recovery until demand rebounds in America and Europe. However, their doughty resilience should not be underestimated. They came roaring back unexpectedly fast after the Asian crisis of the late-1990s. They could surprise again.

Across the region as a whole, the slump has been as bad as it was in 1998. China and India have continued to grow, but in the rest of emerging Asia GDP plunged by an annualised 15% in the fourth quarter of 2008. Only three economies have published first-quarter figures. China’s GDP growth accelerated to an annualised rate of over 6%, up from around 1% in the previous quarter. South Korea’s GDP expanded by 0.2%, after plunging 19% in the previous three months. But Singapore’s GDP fell by 20%, even more than in the fourth quarter.

More timely export figures suggest that the worst may be over. Although the headline numbers show that South Korea’s exports fell by 19% in the year to April, they rose by a seasonally adjusted annualised rate of 53% in the three months to April compared with the previous three months, Goldman Sachs estimates; Taiwan’s grew by an annualised 29% over the same period. China’s exports over the last few months have only managed to stabilise, but its industrial production jumped by an annualised 25% in the past three months.

Economists are revising up their forecasts for China’s GDP growth this year: 8% may now be possible even if American consumers continue to be frugal. There is a widely pedalled myth that China’s growth depends on American consumers. In fact, if measured on a value-added basis (to exclude the cost of imported components), China’s exports to America account for less than 5% of its GDP.

Read On
The basic ideas in this article are that Asia's countries have the government stimulus "ammunition" to ride this out, that they have benefited greatly from the fall in price of commodities, and that they have healthier private business balance sheets.

Then, on the more pessimistic side, an editorial from The Asia Times:

Photo of Shanghai's development from MSNBC

Over the last three- and six-month periods, Chinese stock indexes have led a global rally. China has outdone emerging markets broadly and left US indexes well behind. The iShares FTSE/Xinhua China 25 Index has outperformed the iShares MSCI Emerging Markets Index and the S&P 500. This does not fit standard macroeconomic patterns, theory or intuition.

Leveraged industrial exporters and credit providers do not walk through the blazing destructive fires of the present global economy without getting burned. For 20 years, China has accelerated into the most rapid and sweeping large-country industrial revolution we have ever seen. The changes are real. We are seeing a transfer of industrial production from many locations. Transnational firms from the US, the euro zone and Asia have come for the infrastructure, wage rates, environmental policy, workers and market. They have also come for the bubble.

It is very difficult to separate the bubble from the real economic revolution. Both are clearly present. For the last four months it has been the bubble that has been the dominant element in China perception and investment. The China-centric emerging market bubble has led us up since February 2009.

Read On
This article has an interesting conclusion:
To move from global production with transnational partners to domestic production is a sea change in an economy. This means changing what, where, how and at what wages you produce.


None of this is to doubt the power and transformation of China. It has arrived as a global power and will continue to do so over decades to come. China has not triumphed over the business cycle. No one ever has and no one ever will. As her imports fall, her energy consumption and generation declines and her shipping tonnage falls - China is struggling.

Middle Kingdom investments are a growth play in a global economy without growth. China has arrived and will suffer as the rest of the global economy suffers. Ironically, it is the weakness that shows that China has arrived. The recent meteoric rise of her shares and indexes is simply the latest in a long string of bubbles. As emerging markets and China have led up lately, it seems increasingly likely they will lead the way down.
So basically this author does not see growth in an economy that is so tied to the rest of the world. This author's idea seems to be that China cannot move up in a globalized economy that is unilaterally moving down.

Which opinion is right? Will China's economy be a lone spot of growth in an otherwise dim world economy? Or is the current optimism about China simply irrational exuberance?

1 comment:

Thomas said...

Regarding "consumer spending":

Something I just learnt a few days ago: Chinese "retail sales" (i.e. "consumer spending") apparently includes purchases made by the central government and by the provincial and city governments.

Strange kind of definition of "retail sales", but apparently that's how China defines it. So lots of the stimulus package goes to boost retail sales by definition, even if it isn't "consumption" at all.