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September 22, 2014

Economic Slow Down: A Hard Pill To Swallow For China

By Shaun Richards via QFinance

This year has been one, up to now, where the official data coming out of China has rather neatly fitted the objectives of the Chinese government. The official target of an economic growth rate of 7.5% in 2014 has been followed by official gross domestic product (GDP) numbers that have gone 7.4% in the first quarter and then 7.5% in the second. This does represent a slightly slower rate than was seen in 2013, but makes it look as if the Chinese economy continues to power on almost regardless of what happens elsewhere. However, from time to time, numbers and data emerge which challenge such a state of play and recently we have begun to see them again.

The price of Iron Ore

This has been falling overall since 2013, but the decline has accelerated recently. The Sydney Morning Herald put it like this over the weekend:

"In a consistent slide since December 4, 2013, the benchmark iron ore price has fallen 41 per cent to reach the point where several of Australia’s junior exporters are barely break-even propositions."

Whilst there has been an increase in supply, it also tells us that demand from China has been a factor in the price falls:

"[...] weakness in the Chinese real estate and steel sectors."

"[...] iron ore deliveries to China have been lower in the past two months than they were in the June quarter."

So we see that Chinese demand appears to have thinned out for what is a staple commodity for its economy. There are of course plenty of implications for Australia (hence its name of the South China Territories) in this too was reflected by the way that the Aussie Dollar fell through 90 US Cents this week. As you can imagine, we can expect plenty of "end of the iron age" headlines if this carries on, and we fall further from the current US $82 per ton.

Also if we stick with commodity markets and possible signals, there has also been a decline in the price of crude oil which I discussed last Thursday. This has dipped below the US $97 level for a barrel of Brent Crude Oil earlier this week. There are plenty of other influences on the oil price but we are left wondering if the falls in the oil price are associated with a slow down in China too.

Shipping

This is another way of taking a look at the Chinese economy via the shipping indices. Here the Baltic Dry Index has been having a rough patch. It has improved from the lows of this summer but is 28% below where it was at this time last year. Annual comparisons will be harder as September progresses as this time last year it was in the middle of quite a surge which pushed it above 2000 compared to 1181 now.

However the Harpex index is more positive although it is a long way below the peaks of a few years ago.

Industrial production growth slumps

The numbers for August have created something of a stir.

"In August 2014, the total value added of the industrial enterprises above designated size was up by 6.9 per cent year-on-year (the following growth rates of value added are real growth rates, after deducting price factors), 2.1 percentage points lower than that in July 2014.

"From January to August, the total value added of the industrial enterprises above designated size was up by 8.5 percent."

Compared to a sequence of months where industrial production increased by around 9% this indicates quite a possible slow down which is reinforced by the fact that a year ago we were observing more than 10% growth.

This number particularly resonates because China is much more of an industrial nation than we have become in the western world. Perhaps particularly symbolic has been the fall in the rate of growth of steel production from 15.6% in August 2013 to 2.4% this August.

Electricity production

This has been a number used often to try to get the truth about what is happening in the Chinese economy with all sorts of unofficial estimates being calculated and circulated. This time around, it is the official numbers which have shown a decline as they showed a fall of 2.2% in electricity production in August.

The Chinese statistics agency did show that they can copy the tactics of the evil decadent western imperialists. Via Google Translate:

"[...] low temperatures affect the production of electricity and related industries."

Yes, if all else fails blame the weather!

What about inflation?

As discussed above commodity prices are providing a disinflationary push around the world right now. This will give another push to China’s producer prices which have been falling for over two years now.

"In August 2014, Producer Price Index (PPI) for manufactured goods decreased 1.2 percent year-on-year, and decreased 0.2 percent month-on-month. The purchasing price index for manufactured goods went down by 1.4 percent year-on-year, and decreased 0.1 percent month-on-month."

This has had the effect of reducing consumer inflation in China.

"In August, the consumer price index (CPI) went up by 2.0 percent year-on-year."

Actually a factor keeping it at such a level was a 5.1% rise in the price of pork but quite a few other categories fell in August.

"The month-on-month prices for transportation and communication, clothing, recreation, education, culture articles and services, tobacco and liquor decreased 0.3, 0.2, 0.2 and 0.1 percent respectively."

This is rather different to the 6% plus that consumer inflation in China pushed to in 2011. It is also below the inflation target of 3.5%.

The Yuan

In the early part of 2014 the Chinese authorities allowed the Yuan to weaken. However, in June that phase ended and the Yuan has strengthened from 6.25 to the US Dollar to 6.14 now. It is an interesting change of strategy against a US Dollar which itself has been strong over this period. One impact it will have is that the disinflationary pressures discussed above will be given another nudge.

Comment

We are left with the thought that a slow down in the Chinese economy appears to be happening. On that basis one could easily expect more easing although the authorities would first have to change the official message. From the People’s Bank of China monetary report:

"In the first half of 2014, performance of the Chinese economy was stable. Economic growth, new jobs in the urban areas, and general price levels were all within a reasonable range and the economic structure experienced positive changes."

Meanwhile, there is plenty on news from elsewhere in China. For example, they have just introduced a pedestrian lane in Chongqing for those who are texting on a mobile phone. There are times central London could do with some of those! Also China is displaying a very neutral stance on the issue of Scottish independence by saying that the only change for it would be that it would get an extra ambassador.

Meanwhile we wonder what the impact of falling iron ore prices will be on the Chinese shadow banking sector which has collateralized iron ore.

Courtesy Shaun Richards at Mindful Money via QFINANCE (EconMatters author archive here).

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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