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SLOWDOWN IN CHINA January 2012
1 Nirmal Bang Commodities Pvt. Ltd.
China, the manufacturing giant of Asia is expected to
witness a slowdown in its growth trajectory. Its growth
may lose momentum due to the lack of demand from the
developed nations. It can partly be blamed on Euro
zone’s deteriorating fundamentals. China, the fastest
growing economy moderated to its lowest pace in more
than two years. China has always been the main source
of optimism in the global economy and signs of a
slowdown in China, coupled with trouble in Europe,
show that industrial commodities are in for a bumpy
ride.
The demand for Chinese goods is continuously worsening due to the economic woes in Europe. Exports rose at the slowest
pace in almost two years in October as worsening situation in Europe crumbled demand. The weakness in export demand
is expected to continue in the near future due to the economic slowdown across the globe.
The Chinese economy is expected to register a second year of below-trend growth because of the headwinds from the global
slowdown, domestic housing market weakness and limited room for policy stimulus.
pause in the growth of China:
The Gross Domestic Product (GDP) of China started
decelerating in early 2010 from 11.9% to 9.1% for
the latest quarter. The GDP growth rate of the third
quarter of 2011 decreased to 9.1% compared to
9.7% and 9.5% growth rates recorded in the first
and second quarters, respectively. China's
economic growth rate has declined for three
successive quarters and further it is expected to be
around 8.7% for the final quarter.
The four major driving forces of the Chinese
economy are investment, consumption, imports
and exports. Let us look at the constituents of the
GDP:-
Industry sector contributes 47% to the total
GDP (inclusive of Investment, Real Estate,
Manufacturing, Mining etc)
Services sector contributes to 43% of the total
GDP, and
Agriculture’s contribution to the GDP is 10%
This indicates that China’s economy is heavily
relying on the industrial activity and any
slowdown in industrial activity will be a pain for
the entire economy. China, as an export-oriented
economy is dependent on the developed nations
(EU, US, UK and Japan). So, if these economies are
witnessing a slower growth, then the dependent
economies are more likely to face a ripple effect.
The global GDP growth has been revised lower to
1-1.5% from 2.5%, this gives a clear indication that
all the major contributors to world GDP will face a
slowdown. In 2007, the last year before the
international financial crisis, China accounted for
only 6.3% of the world GDP. In the following three
years the world economy expanded by $7.2 trillion,
while China’s economy grew by $2.4 trillion, which
means China accounted for 33% of world growth.
In contrast, in 2007, the US accounted for 25.1% of
world GDP, but in the next three years the US
economy grew by only $0.6 trillion.
Therefore, in the last three years, China’s economy
contributed as much as four times to the global
growth compared to the US. On the other hand, EU
contracted by $0.7 trillion during the same period.
Going further, if the world economic outlook is
deteriorating then the world GDP is going to
contract substantially. The economies which
contribute majorly to world GDP growth will hit
the most as a result of which we will see a fall in
the GDP of China to the levels of 7.5-8%. Moreover,
Chinese officials are also confirming about the
sluggish growth rate for FY12. On account of lower
demand from the developed nations, the world
GDP is likely to contract for FY12, and thus the
demand for Chinese products will witness a
slowdown. A drop in the World GDP by 1-1.25%
will eventually lead to a massive fall in GDP of
China by almost 1.5-2%.
The fall in China’s exports will eventually increase
the dependency on the local demand. China spends
about 50% of the GDP on fixed investments as
compare to the world average of under 20%.
Unlike India, the Chinese growth story is
investment-led and not consumption-led. Whereas,
the current scenario indicates that only 30% of the
total GDP comprises of consumer spending from
the people of China. Looking at the scenario we feel
that domestic consumption will not be sufficient
enough to achieve the targeted growth rate of 8%
for FY12.
In view of the gloomy developed market outlook,
we think that China's export and import growth
will weaken substantially in 2012. The shady
picture over the housing market in China will
eventually lead to a fall in investment demand and
the consumption will drop further. China seems to
be on the verge of hard landing in FY12.
Shrinking Exports a Cause of Concern:
A slowdown in exports is a major cause of concern
for China. The country has managed to store the
largest forex reserve on the back of their exports
and any significant fall in exports will lead to
imbalances in their current account numbers.
The current account surplus has shrunk from 10.1%
of GDP in 2007 to 5.2% in 2010, and is likely to
decline further to 3.5% in 2011.
Meanwhile, the share of China's exports to G3 (US
Europe and Japan) has lowered. The weak demand
from G3 could still have significant implications for
China's exports since G3 still represents the largest
destination with the total share exceeding 44%
(about 20% of the total exports are shipped to the
EU).
The lower export growth and the relatively higher
import growth would lead the trade surplus to
narrow further in 2012, turning the contribution of
net exports from growth into a drag in 2012.
Chinese officials have also revised their projections
for exports growth to 10% till 2015. The trade
balance of China accounted for $296.96 billion for
the year 2008. For the year 2011, it is estimated to
be $150.12 billion. A continuous drop in trade
balance will actually lead to a drop in current
account numbers and the forex reserves will
decline, which may lead to the beginning of the
end.
China, a net importer of copper and crude oil, has
showed a stable increase in imports on an annual
basis. However, the percentage growth year-onyear
kept fluctuating. The cumulative annual
growth of oil and copper imports in China stood at
9.4 and 19.12% from the year 2004-11 respectively.
We have seen a massive increase in the import
numbers of both commodities in the year 2011.
Copper imports rose by 50% and oil by 8%
compared to 2010. Strong imports were mainly
supported by the decent GDP numbers recorded
last year which sustained above 9%.
However, we expect a contraction in GDP for FY 12
due to global slowdown. This would ultimately
result into lower demand for copper and crude oil.
As per our estimates for FY12, copper imports are
likely to grow by 4-5% as compared to 50% growth
last year, and crude oil imports may shrink to 1.6%
as compared to 8.8% growth in the previous year.
China accounted for exponential demand for
commodities since the last three years and now
with looming prolonged slowdown, we feel that
demand for industrial commodities may drop
significantly.
Real Estate Bubble:
Over the years talks of a real estate bubble in China
is threatening the world, the decelerating Chinese
economy is going to be the theme of the world in
the next quarter and the downturn in the housing
market is likely to affect the entire financial market
for the times ahead. Bursting of the real estate
bubble in China which is still under covers will be
the worst nightmare for the entire globe.
The GDP of China was rising at the rate of 8-10%
for the year 2005 to 2009 and the prices of new
homes were rising at an average rate of 100% for
2005-2009. The prices of property were reaching
new highs but the income of the people of China
was not rising with the same growth rate.
Between 2005 and 2009, the average housing prices
had almost tripled. The number of unoccupied
residential and commercial units has risen for the
same period, indicating that the investment
demand was one of major reasons for the surge in
property prices.
The prices started declining in the month of May
2010. However, the first sign of a downturn
emerged in May 2010 when China’s top 10
property developers reported unsold inventories
totaling $50 billion, up 46% from the previous year.
Beijing home sales volume in the first 11 months of
2011 was down 27% year-on-year, to a 10 year
record low, according to property agency Homelink.
S&P has downgraded its outlook for China’s real
estate development sector to negative from stable
on the back of tight credit conditions in the country
and slower sales.
It is estimated that 64 million apartments are
vacant in China and construction is still going on
(investment led growth). Chinese property
developers are now experiencing a severe credit
crunch due to Chinese government funding
restrictions and we expect fire sales may reduce
prices rapidly. Moreover, individual property loans
are also drying up, which will further hammer the
banking industry of China.
Looking at few fact and figures, in Shanghai, we
saw a surge of 150% in real estate prices from 2003
to 2010. In Tianjin, it is also projected to have more
prime office spaces, which will be absorbed in the
next 25 years at the current rate.
The investment demand which was created in
Chinese real estate market would not sustain with
slower growth of the economy as the GDP estimate
has been revised lower by Chinese officials.
The world has emerged from one of the worst
crises of 2007-08, which started with assumptions
in the U.S. that “housing prices will never fall”
and similar tendencies have been observed in
China where real estate prices have doubled over
the last 4-5 years. This is a start of housing crises in
China and it will worsen and a domino effect of
the same will be felt everywhere in the economy.
Conclusion:
The slowdown in China is making things worse for
the global economy. The country’s weak
manufacturing PMI clearly depicts that the growth
in the sector is actually contracting.
It reported its purchasing managers index (PMI) as
49.0 for November, which slipped to its lowest
level since February 2009 and a minute uptick in
PMI numbers in the month of December does not
signify growth.
Property prices are also declining at a rapid pace in
some of the major cities of China. According to
property agency Homelink, new home prices in
Beijing fell 35% i.e. more than one-third, in
November alone.
Looking at the Shanghai Composite Index,
investors got a negative return of around 22% in
the year 2011, indicating a weak investment
scenario in the Chinese economy.
According to the Chinese government website
(www.gov.cn), the audit found 10.7 trillion Yuan of
government debt as on 2010. The audit also found
several companies with false financing. The
National Audit office report found 531 billion Yuan
(US $ 84 billion) worth of irregularities in local
government debt.
After the rapid rise in interest rates this year, we
have seen many commodities traders pledging
their commodity stocks to obtain loans from banks
and post that we saw a massive correction in
prices of many commodities, which may pose
problems to banks and may lead to fire sale of
such commodity. Collapse in housing prices may
lead to rising NPAs in Chinese bank’s books
leading to more problems in the economy.
Global growth is likely to remain capped in 2012
due to Europe’s ongoing debt crisis and the
slowdown in China. We may see the Global
economy growing around 1.25% and 1.5% in 2012,
down from the 2.5% growth rate seen in 2011.
Hence, we expect Chinese economy to grow below
8% for the year 2012.
All these factors are heading towards a major
slowdown in the Chinese economy. Being the top
consumer of commodities we may see demand
destruction due to the slowdown in the second
largest economy of the world. Chinese slowdown
poses serious risks to prices of industrial
commodities. The slowdown in China will remain
a key issue for the rest of 2012 coupled with the
sovereign debt crisis in Europe.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
SLOWDOWN IN CHINA January 2012
1 Nirmal Bang Commodities Pvt. Ltd.
China, the manufacturing giant of Asia is expected to
witness a slowdown in its growth trajectory. Its growth
may lose momentum due to the lack of demand from the
developed nations. It can partly be blamed on Euro
zone’s deteriorating fundamentals. China, the fastest
growing economy moderated to its lowest pace in more
than two years. China has always been the main source
of optimism in the global economy and signs of a
slowdown in China, coupled with trouble in Europe,
show that industrial commodities are in for a bumpy
ride.
The demand for Chinese goods is continuously worsening due to the economic woes in Europe. Exports rose at the slowest
pace in almost two years in October as worsening situation in Europe crumbled demand. The weakness in export demand
is expected to continue in the near future due to the economic slowdown across the globe.
The Chinese economy is expected to register a second year of below-trend growth because of the headwinds from the global
slowdown, domestic housing market weakness and limited room for policy stimulus.
pause in the growth of China:
The Gross Domestic Product (GDP) of China started
decelerating in early 2010 from 11.9% to 9.1% for
the latest quarter. The GDP growth rate of the third
quarter of 2011 decreased to 9.1% compared to
9.7% and 9.5% growth rates recorded in the first
and second quarters, respectively. China's
economic growth rate has declined for three
successive quarters and further it is expected to be
around 8.7% for the final quarter.
The four major driving forces of the Chinese
economy are investment, consumption, imports
and exports. Let us look at the constituents of the
GDP:-
Industry sector contributes 47% to the total
GDP (inclusive of Investment, Real Estate,
Manufacturing, Mining etc)
Services sector contributes to 43% of the total
GDP, and
Agriculture’s contribution to the GDP is 10%
This indicates that China’s economy is heavily
relying on the industrial activity and any
slowdown in industrial activity will be a pain for
the entire economy. China, as an export-oriented
economy is dependent on the developed nations
(EU, US, UK and Japan). So, if these economies are
witnessing a slower growth, then the dependent
economies are more likely to face a ripple effect.
The global GDP growth has been revised lower to
1-1.5% from 2.5%, this gives a clear indication that
all the major contributors to world GDP will face a
slowdown. In 2007, the last year before the
international financial crisis, China accounted for
only 6.3% of the world GDP. In the following three
years the world economy expanded by $7.2 trillion,
while China’s economy grew by $2.4 trillion, which
means China accounted for 33% of world growth.
In contrast, in 2007, the US accounted for 25.1% of
world GDP, but in the next three years the US
economy grew by only $0.6 trillion.
Therefore, in the last three years, China’s economy
contributed as much as four times to the global
growth compared to the US. On the other hand, EU
contracted by $0.7 trillion during the same period.
Going further, if the world economic outlook is
deteriorating then the world GDP is going to
contract substantially. The economies which
contribute majorly to world GDP growth will hit
the most as a result of which we will see a fall in
the GDP of China to the levels of 7.5-8%. Moreover,
Chinese officials are also confirming about the
sluggish growth rate for FY12. On account of lower
demand from the developed nations, the world
GDP is likely to contract for FY12, and thus the
demand for Chinese products will witness a
slowdown. A drop in the World GDP by 1-1.25%
will eventually lead to a massive fall in GDP of
China by almost 1.5-2%.
The fall in China’s exports will eventually increase
the dependency on the local demand. China spends
about 50% of the GDP on fixed investments as
compare to the world average of under 20%.
Unlike India, the Chinese growth story is
investment-led and not consumption-led. Whereas,
the current scenario indicates that only 30% of the
total GDP comprises of consumer spending from
the people of China. Looking at the scenario we feel
that domestic consumption will not be sufficient
enough to achieve the targeted growth rate of 8%
for FY12.
In view of the gloomy developed market outlook,
we think that China's export and import growth
will weaken substantially in 2012. The shady
picture over the housing market in China will
eventually lead to a fall in investment demand and
the consumption will drop further. China seems to
be on the verge of hard landing in FY12.
Shrinking Exports a Cause of Concern:
A slowdown in exports is a major cause of concern
for China. The country has managed to store the
largest forex reserve on the back of their exports
and any significant fall in exports will lead to
imbalances in their current account numbers.
The current account surplus has shrunk from 10.1%
of GDP in 2007 to 5.2% in 2010, and is likely to
decline further to 3.5% in 2011.
Meanwhile, the share of China's exports to G3 (US
Europe and Japan) has lowered. The weak demand
from G3 could still have significant implications for
China's exports since G3 still represents the largest
destination with the total share exceeding 44%
(about 20% of the total exports are shipped to the
EU).
The lower export growth and the relatively higher
import growth would lead the trade surplus to
narrow further in 2012, turning the contribution of
net exports from growth into a drag in 2012.
Chinese officials have also revised their projections
for exports growth to 10% till 2015. The trade
balance of China accounted for $296.96 billion for
the year 2008. For the year 2011, it is estimated to
be $150.12 billion. A continuous drop in trade
balance will actually lead to a drop in current
account numbers and the forex reserves will
decline, which may lead to the beginning of the
end.
China, a net importer of copper and crude oil, has
showed a stable increase in imports on an annual
basis. However, the percentage growth year-onyear
kept fluctuating. The cumulative annual
growth of oil and copper imports in China stood at
9.4 and 19.12% from the year 2004-11 respectively.
We have seen a massive increase in the import
numbers of both commodities in the year 2011.
Copper imports rose by 50% and oil by 8%
compared to 2010. Strong imports were mainly
supported by the decent GDP numbers recorded
last year which sustained above 9%.
However, we expect a contraction in GDP for FY 12
due to global slowdown. This would ultimately
result into lower demand for copper and crude oil.
As per our estimates for FY12, copper imports are
likely to grow by 4-5% as compared to 50% growth
last year, and crude oil imports may shrink to 1.6%
as compared to 8.8% growth in the previous year.
China accounted for exponential demand for
commodities since the last three years and now
with looming prolonged slowdown, we feel that
demand for industrial commodities may drop
significantly.
Real Estate Bubble:
Over the years talks of a real estate bubble in China
is threatening the world, the decelerating Chinese
economy is going to be the theme of the world in
the next quarter and the downturn in the housing
market is likely to affect the entire financial market
for the times ahead. Bursting of the real estate
bubble in China which is still under covers will be
the worst nightmare for the entire globe.
The GDP of China was rising at the rate of 8-10%
for the year 2005 to 2009 and the prices of new
homes were rising at an average rate of 100% for
2005-2009. The prices of property were reaching
new highs but the income of the people of China
was not rising with the same growth rate.
Between 2005 and 2009, the average housing prices
had almost tripled. The number of unoccupied
residential and commercial units has risen for the
same period, indicating that the investment
demand was one of major reasons for the surge in
property prices.
The prices started declining in the month of May
2010. However, the first sign of a downturn
emerged in May 2010 when China’s top 10
property developers reported unsold inventories
totaling $50 billion, up 46% from the previous year.
Beijing home sales volume in the first 11 months of
2011 was down 27% year-on-year, to a 10 year
record low, according to property agency Homelink.
S&P has downgraded its outlook for China’s real
estate development sector to negative from stable
on the back of tight credit conditions in the country
and slower sales.
It is estimated that 64 million apartments are
vacant in China and construction is still going on
(investment led growth). Chinese property
developers are now experiencing a severe credit
crunch due to Chinese government funding
restrictions and we expect fire sales may reduce
prices rapidly. Moreover, individual property loans
are also drying up, which will further hammer the
banking industry of China.
Looking at few fact and figures, in Shanghai, we
saw a surge of 150% in real estate prices from 2003
to 2010. In Tianjin, it is also projected to have more
prime office spaces, which will be absorbed in the
next 25 years at the current rate.
The investment demand which was created in
Chinese real estate market would not sustain with
slower growth of the economy as the GDP estimate
has been revised lower by Chinese officials.
The world has emerged from one of the worst
crises of 2007-08, which started with assumptions
in the U.S. that “housing prices will never fall”
and similar tendencies have been observed in
China where real estate prices have doubled over
the last 4-5 years. This is a start of housing crises in
China and it will worsen and a domino effect of
the same will be felt everywhere in the economy.
Conclusion:
The slowdown in China is making things worse for
the global economy. The country’s weak
manufacturing PMI clearly depicts that the growth
in the sector is actually contracting.
It reported its purchasing managers index (PMI) as
49.0 for November, which slipped to its lowest
level since February 2009 and a minute uptick in
PMI numbers in the month of December does not
signify growth.
Property prices are also declining at a rapid pace in
some of the major cities of China. According to
property agency Homelink, new home prices in
Beijing fell 35% i.e. more than one-third, in
November alone.
Looking at the Shanghai Composite Index,
investors got a negative return of around 22% in
the year 2011, indicating a weak investment
scenario in the Chinese economy.
According to the Chinese government website
(www.gov.cn), the audit found 10.7 trillion Yuan of
government debt as on 2010. The audit also found
several companies with false financing. The
National Audit office report found 531 billion Yuan
(US $ 84 billion) worth of irregularities in local
government debt.
After the rapid rise in interest rates this year, we
have seen many commodities traders pledging
their commodity stocks to obtain loans from banks
and post that we saw a massive correction in
prices of many commodities, which may pose
problems to banks and may lead to fire sale of
such commodity. Collapse in housing prices may
lead to rising NPAs in Chinese bank’s books
leading to more problems in the economy.
Global growth is likely to remain capped in 2012
due to Europe’s ongoing debt crisis and the
slowdown in China. We may see the Global
economy growing around 1.25% and 1.5% in 2012,
down from the 2.5% growth rate seen in 2011.
Hence, we expect Chinese economy to grow below
8% for the year 2012.
All these factors are heading towards a major
slowdown in the Chinese economy. Being the top
consumer of commodities we may see demand
destruction due to the slowdown in the second
largest economy of the world. Chinese slowdown
poses serious risks to prices of industrial
commodities. The slowdown in China will remain
a key issue for the rest of 2012 coupled with the
sovereign debt crisis in Europe.
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