Economic report: China - December 2011

1. Appreciation of the economic problems and issues
   

Late fall 2011 has seen growing concerns about the risk of a hard landing in China, probably stirred by the news of declining housing prices in a growing number of cities, the default of many small- and medium-sized enterprises and financial difficulties experienced by local government funding platforms. Although similar problems have led to the collapse of economic activity in other countries and the recent developments uncover serious vulnerabilities of the Chinese economy, it seems premature to draw an imminent hard landing scenario for the Chinese economy. Even though the Chinese economy shows symptoms of a cooling down, growth figures still remain on a high level.

With inflation climbing to record levels in spite of GDP growth gradually declining, economic indicators were giving mixed signals until they began to speak a clearer language in fall 2011: Real GDP growth continued to follow a trend of moderation throughout 2011, gradually declining from 9.8% in the fourth quarter 2010 down to 9.1% in the third quarter of 2011. China’s export sector felt the effects of a deteriorating economic outlook in the US and in particular the EU where expansion fell from 22.3% in August to 7.5% in October. Although the decline of export growth to the US and the EU was buoyed to some extent by a continued strong rise in sales to emerging markets, in particular to South-East-Asian Countries, the overall the year-on-year growth of Chinese merchandise exports gradually declined from 24.5% in August to 13.8% in November.

Retail sales growth also cooled slightly from 17.8% in September to 17.2% in October. Moreover, there are fears that sales of household appliances and consumer electronics goods could be hit in the coming months as a subsidy scheme, which subsidies rural purchases of many appliances, will reach its conclusion within the coming months in several provinces.

In the wake of these developments, the official Purchasing-Managers-Index fell to 49% in November - the lowest since the financial crisis in February 20094 and below the 50% mark that separates expansion from contraction - causing several economists to correct their GDP growth estimates for the next quarters downwards.

Fixed-asset investment in urban areas continued to grow at a fast pace in the first nine months of 2011, that is up by 24.9% year on year. However, iron ore prices tumbled by nearly 36% from MidSeptember to the end of October, indicating deteriorating prospects from the construction sector, whose demand for steel drives iron ore prices.

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