Monday 19 October 2015

China may be slowing but it's still a sleeping giant

Chinese GDP came in at 6.9% a mere 0.1% higher than the expected 6.8% that was predicted by economists as the likelihood of the world's second largest economy reaching it's goal of 7% growth for the years is seemingly unlikely.

Although the numbers were better than forecasts there will be continued uncertainty around the number for months to come with much focus on industrial production figures which has taken a beaten. It's a part of the economy that plays a tremendous role in facilitating the allocation of the factors of productions most notably the labour factor which helps stimulate spending in the retail sector.

We saw last week trade numbers leaving a bitter taste in the mouth of investors with downbeat forecasts especially regarding the importation of goods. China imports a number of commodities that it uses in its industrial process to manufacture products which it exports to the rest of the world. The disappointing import numbers show that world's reliance on China's spending  has led to a slump in commodity prices by over supplying the market with unwanted material by predicting a higher degree of demand from the Chinese economy.
 However the slowdown hasn't been an instant occurrence but instead been in place for a protracted number of months which does leave one wondering how commodtiy producers couldn't see this coming. It's either a case of being ignorant of the facts before them which I don't see a possible as these companies hire seasoned forecasters to analyse these things or realising the error of their way in their overestimation but were unable to halt progress of these capital projects fast enough so as to well up needed cash flow to shelter themselves from the commodities downturn.  

If you think back to the commodity super cycle that materialized pre-financial crisis, you can't blame these mining companies from expecting an even stronger demand when markets began to normalize after a financial system collapse. However one needs to question the degree of normalization given the markets obsessant need for free money at low interest rates.


In conclusion we could say they were caught napping...

But all is not lost if you put things in the context at the pace at which the "Sleeping Giant" is growing at. I thought this cartoon perfectly summed up how things stand between the world's two largest economies.

On the one hand you have the Chinese who have set about revamping an economic system that has for decades fallen behind modern economies on account of the failure of the previous system by failing to adequately meet the desire of the needs of its people, the largest population in the world I might add, however authorities still have a number of policy measures open to them should further need to inject the economy with stimulus arise.

Then on the other an economic giant that has hailed as a world leader for a number of years but has subsequently become complacent in its development, reverting to measures of credit creation to stimulate its economy which has now caught up with policymakers now sitting in a tricky situation.

The world's belief that the US economy is the most important of them all shows a divergence between the past and the future.  In the years to come we'll begin to see this dominance transfer from the old to the new with the current situation signalling the start.
To sum it all up I picked out this stat that highlights everything that I've highlighted. In 23 years the Chinese economy has grown 30 times, phenomenal given the amount of time. If the world's second largest economy is able to do this what can it do in the next 25 years?
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