China faces ‘economic restructuring’

A year ago, it was fashionable to claim that the Asian economies had ‘decoupled’ from the West. Any slowdown would simply pass them by. Last December, I noted a rare dissenting voice, Stephen Roach of Morgan Stanley, who commented that ‘decoupling is a good story, but its not going to work going forward’. In March, I noted that ‘away from the headlines, the Shanghai stock exchange has been collapsing’, and was already down 44% from its peak.
Now the politicians are becoming concerned. The government has replaced its previous goals of ‘preventing over-heating of the economy and controlling inflation’. Instead, according to President Hu Jintao, the aim is to ‘maintain steady, relatively fast development and control excessive price rises’. There has also been public discussion in the ‘People’s Daily’ of whether the economy is at ‘a turning point’.

There are many signs of this turning point. Exports are weakening, as the Western economy slows – one luggage maker told the New York Times his sales have dropped 20% this year. In turn, this has led to slower orders for domestic suppliers, and slower consumer demand. JD Power has just cut its forecast for car sales this year by 4%.

Unlike many Western politicians, however, who prefer reassurance to reality, China’s Liu He, a finance Vice Minister, was quite blunt about the situation in an interview today. He commented that ‘the era of low costs and high growth has come to an end for China, and an economic restructuring is inevitable’. Southern China is already suffering, with property prices in some areas of Shenzen down 40% over the past year.

One can already see some results of this new policy in action. Support for exports seems to be a high priority – the currency is once again being allowed to weaken, export tax refunds for garment manufacturers have been increased, and bank lending limits eased. Asian chemical companies outside China will suffer as a result. Not only will their own exports to China reduce as its domestic markets slow, but they may well face increasing Chinese competition in other markets as well.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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