The Chinese Slowdown

July 9, 2012 at 6:37 pm  ·  Category: China, Commodities, Europe, Macro Economics, Top Gun Financial Planning

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As much of an effect as the European crisis is having on the United States, the impact on China may be far worse. That’s because China’s economy is structured around exports which account for about 30% of its GDP. Most of those exports go to the US and Europe.

In addition to pressure on their exports from the slowdown in Europe, China appears to be in the midst of a massive housing bubble. According to Nicholas Lardy, an economist at The Peterson Institute, residential construction accounted for 9% of China’s GDP last year. It was 6% in the US at the peak of the housing bubble in 2006.

20% of Beijing residents own two or more apartments in the city. One wonders how good an investment these will turn out to be given the massive oversupply which has left many of them vacant and unsold. Developers in Beijing and Shanghai hang curtains over their new luxury high rises to hide the fact. Outside of the leading cities things are even worse. An internet search turns up haunting pictures of “ghost towns” like Ordos, China, built for a population of a million but housing only a few thousand.  (Time Magazine put together a revealing photo gallery: “Ordos, China: A Modern Ghost Town”).

More and more, government spending on expensive infrastructure projects is driving GDP. However, it is not clear that these projects are an efficient use of resources. For example, a recently completed bullet train.*

Nike’s (NKE) earnings report last week supported the idea of a slowdown in China. Reported future orders from China, scheduled for delivery between June and November of this year, increased only 2% compared to the year ago period. That is down from 20%, 27% and 22% in the previous three quarters. Sterne, Agee & Leach led off their report downgrading Nike from Buy to Neutral last Friday writing: “China gets the blues”. The stock was crushed two Fridays ago, down 9% on volume more than twice any other day in the last year.

Given the structure of the global economy, a slowdown in China has ripple effects further down the structure of production. As China has become the world’s manufacturing center, countries like Australia and Brazil have benefited by supplying raw materials. The bloom appears to be off a commodity boom that has infused both countries’ economies in the last decade. Australian mining behemoths Rio Tinto (RIO) and BHP Billiton (BHP) as well as Brazil’s Vale (VALE) are off 30% to 50% from their highs early last year dragging each countries’ major index down almost 20% over the same period.

* Material from the previous three paragraphs relies heavily on the Barron’s cover story “Falling Star”, Jonathan Laing, June 30.

Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
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Granite Bay, CA 95746
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One Response to “The Chinese Slowdown”
  • I just visited China and spent 2 weeks in Shanghai,Wuhon and Beijing.You are correct—They are spending millions in infrastructure.They have the worlds supply of large cranes building tall apartment buildings everywhere,including farm areas.They are expanding rail lines to handle more bullet trains.Subway lines also expanding to outer circles in Shanghai and Beijing.Tunnels,Bridges and 6 to 10 lane highways are being built.Many of the new apartment buildings are not finished inside.Tourism is a big business with large modern hotels.Traffic is also very heavy with roads full from early morning till late evening.Notable changes from my last visit in 1994 included every American chain and business open for customers.Also that English speaking chinese are in every place you visit—from Hotel to store to taxi to restaurant.The Goverment is trying to deal with the world slowdown as it has dramatically affected China and its manufacturig.

    J.Wolfgang  ·  Jul 16, 2012 at 4:00 pm  ·  Permalink

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