China Growth in Doubt

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Global Trade

There are some interesting indicators that all is not well with the Chinese economy. On the face of it, growth is, while down a little on a year ago, still robust by anyone’s standards. But dig a little under the surface and there are indications that major changes are taking place in the economy and the Chinese are having trouble managing the pace and direction of change.

The State Council’s Development Research Center said in a statement that companies “are facing increasing difficulties and this could curb economic growth and reduce employment and incomes.” The Purchasing Managers Index is based on a survey that started in January 2005 of more than 700 companies in 20 industries, including energy, metallurgy, textile, automobile and electronics. A reading above 50 reflects an expansion, below 50 a contraction. The output index fell to 47.4 in July from 54.2 in June, while the index of new orders dropped to 46.2 from 52.6. The index of export orders declined to 46.7 from 50.2.

At the same time, evidence suggests that as China’s economy cools in response to a softening global market it is also transitioning from low wage low tech employment, with the closure of many low wage factories, previously the power house of Chinese industrialization, to the growth or higher tech automotive, electronics and biotechnology industries. But may be the change is happening too fast for the authorities. They raised export rebates for textiles and slowed the appreciation of the RMB in an attempt to stem the tide of closures and maintain growth and employment.

It would seem the Chinese economy is not immune to a world slowdown and will find it a much greater challenge encouraging the economy to evolve into a higher value add, higher technology economy in the face of a global downturn. This will add to the volatility in the rebate, taxation and exchange balance dealing in regard to China. The market has already accepted that the RMB may not continue the steady appreciation we saw through 2007 and a pause is now likely for the foreseeable future.

–Stuart Burns

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