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China’s Vice Premier Wang Qishan reiterated his country’s plan to meet the global economic slowdown by keeping ready $1.7 for trillion strategic spending. Most China watchers know this isn’t entirely news, as China has let it be known that it would deploy financial resources to meet the global economic slowdown if it should worsen and affect China more. What was compelling about the vice premier’s recent remarks were his comments on the state of the world economy. Wang sees a “certain chronic global recession,” and added further unsurprising but revealing comments that indicate China is far more concerned about taking care of its own economy than worrying about rescuing Europe or the rest of the world.

Chinese Vice-Premier Wang Qishan

Global Alarm

The ongoing drama in Europe with the daily difficulties of the 17 nations trying to get a grip on their ever-shifting economic crisis has made for deep worries around the globe. The recent failed German bond auction gave rise to a new series of concerns, led by the idea that if Germany, by far the strongest economy in the eurozone, is further affected by the crisis, things may continue to get worse. The prospect of a German economy weakened from trying to deal with the problems of the other eurozone nations put a further scare into investors around the world. Prior to the Thanksgiving holiday in the US, the markets sold off vigorously.

China’s Slowdown

A preliminary HSBC report for November on the purchasing managers’ index, or PMI, showed that Chinese manufacturing contracted the most in the last 32 months, since March 2009. The reading then was 46.7.The early or flash reading for the HSBC report for November, based on roughly 90 percent of what will be the final data, showed a reading of 48, compared to a reading of 51 last month. A reading of 50 is considered the dividing line between economic expansion and economic contraction, so the latest numbers show China’s domestic economy is slowing. HSBC economist Qu Hongbin, quoted in a Bloomberg article, said that China’s economic output will slow from what has been a 14 percent rate this year to an annual rate of 11 to 12 percent.

Slowing Areas

The weaker Chinese PMI has been affected by the slowing in property market. Home prices fell as did property sales. There has been a dramatic slowing also in the manufacturing segment, with widespread factory closings or downsizings on the horizon. We have already seen the cutback in the solar industry, as earnings reports from some of the Chinese solar companies have recently shown. The near term outlook for China’s solar indicates a tightening of the market. Autos, steel, shipping-all manufacturing or related industries, are also feeling the pinch in China. The banking and finance industry, due to the general slowing of the economy, along with slower lending, has contracted.

Worker At Construction Site, Yulin, Shaanxi Province, China

China’s Remedy

The readiness of China to spend $1.7 trillion, or 10 trillion yuan, is not without precedent. In the wake of the US and global economic crisis which showed its effects by 2009, China spent roughly 4 trillion yuan, or more than $600 billion, to attempt to blunt the effects. Although China’s economy did feel some effects from the crisis, the spending strategy largely paid off, as the Chinese economy did not suffer the same as the US and other developed nations. China’s GDP remained robust, at 9.6 percent in 2008 and 9.2 percent in 2009.

China’s plan for its spending this time around does not include a simple dumping of money into its economy by the government, through its policy arm, China’s central bank. China has seen the effects of the Shanghai Composite’s 14 percent drop this year due to monetary tightening in the face of inflation, and slower global demand. But with consumer inflation recently slowing to 5.5 percent, there has been some talk instead of loosening, though most observers feel China’s central bank won’t resort to any dramatic interest rate move.

The government has been saying that it would be making lending more available to the small and medium enterprises, or SMEs, the entrepreneurial private businesses which have become so important for China’s growth. The recent report that the central bank cut reserve requirements for five rural banks in the eastern Zhejiang province, may be followed by an overall move to lower the bank reserve rate for larger banks, which currently stands at 21.5 percent.

The Wider Picture

China still won’t be moving either rapidly or dramatically with its easing, and the government will be able to keep much of its firepower ready in waiting as it observes both how its economy runs at home along with a keen eye toward how the global economy runs. The fine tuning approach will be predicated on what is good for China by China. That shouldn’t be any surprise, as it’s exactly what any other major economic power would and does do. The question isn’t really whether China can or will save the global economy, but whether it will be able to walk a fine policy line and keep its own near term prospects bright in spite of the global economic mess.

Committed to your Global Profits,

Jim Trippon
Chief Investment Analyst