Several articles have come out recently drawing on November oil imports, trade and electricity data to suggest China is slowing rapidly and potentially heading for a hard landing.
The FT reported this week that Chinese export and import growth both decelerated in November, suggesting Beijing could soon halt appreciation of the renminbi as a result. A move added some credence by comments made by the former vice-prime minister, Zeng Peiyan, and a senior delegation of Chinese business leaders to a New York gathering of hedge funds and bankers seen as a preemptive strike.
The Chinese message was stark, according to multiple guests: if your Congress passes a bill labeling us as currency manipulators, we will crush you no specific promise was given on how, but one can hypothesize about various strategies they may adopt. The point being, Beijing is wary that calling a halt to the appreciation will add fuel to the “manipulator” fire. More to the point, the slowing of both imports and exports is seen as a general slowing of the economy, not just a collapse in exports. However, it should be said China was still left with a $14.5 billion surplus on the month, a result any other country would be proud of.
Effect on Commodities
Petrochemical prices and demand have also fallen, according to the FT, led by Naptha, used in the production of plastics for construction and light manufacturing. Maybe most telling is the drop in electricity production, seen by Reuters to be as much a benefit as a sign of falling economic activity.
A benefit because the country was expected to face power shortages, as China has in previous years (usually due to insufficient rainfall), harming hydroelectric power plants’ ability to operate at full capacity; but this year, potentially exacerbated by coal-fired plants facing high coal costs and operating close to or below breakeven.
China derives 80 percent of its electrical power from coal-fired power stations and 80 percent of its power is consumed by industry, so falling electricity production directly impacts industry and vice versa. Nuclear was the only sector to experience an outright contraction, probably due to the closure of several power stations after Fukushima, contracting 6.5 percent, but set that against an overall 8.5 percent increase in electricity generation and coal increased 9 percent in spite of high coal prices and hydro increased 6.3 percent. An 8.5 percent increase in overall power production is pretty much in line with GDP growth, and so in our opinion is not the harbinger of a hard landing some are suggesting.
On the contrary, with falling inflation Beijing is in a position to relax lending controls, initially on bank reserve ratios, and encourage more investment growth. China’s growth will be lower than previous years — with its largest export market (Europe) heading for Armageddon, it can hardly be otherwise — but a hard landing seems unlikely.
China doesn’t have the room for a massive stimulus like it did in 2009, but it has plenty of levers at its disposal to raise modest domestic consumption and growth, and even in exports the country is still achieving double-digit growth at 13.8 percent in November. Far from heading for a fall, China seems to have achieved a relatively successful cooling from its breakneck expansion last year.