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March 31, 2012

7 Signs of an Impending Recession in China

By Louis Basenese of Wall Street Daily 

Much debate has already transpired over whether or not China – the world’s fastest-growing economy – is headed for a recession.

The most zealous China bulls consider such a possibility sacrilegious. Meanwhile, savvy hedge fund managers – with impressive track records, like Jim Chanos of Kynikos Associates – consider it a certainty.

So how’s an ordinary investor supposed to make any sense of such diametrically opposed viewpoints?

It’s simply, really. Stick to the facts. Specifically, the latest data points coming out of China. And then ask this question: Is this the picture of a country in tip-top economic shape?

Here’s a breakdown of the evidence…

~ China Warning Sign #1: GDP Slowdown

In the last quarter, China’s economy grew by 8.9%. When you compare it to the sub-3% GDP growth in the United States, it sounds phenomenal. But put it into context, and you realize it represents the slowest pace in two-and-a-half years for China. This isn’t some blip, either. China’s government is calling for even more deceleration. It recently lowered its GDP growth target to 7.5%. Another problem? Those numbers aren’t exactly trustworthy…

~ China Warning Sign #2: Unreliable Statistics

If you don’t have anything to hide, you tell the truth, right? Well, if that’s the case, China has a problem. Last month, the country’s statistics bureau revealed that local governments were forcing businesses to report “seriously untrue” data. The net effect? GDP, based upon local government figures, was 8.8% higher than the national figures calculated by the statistics bureau. And this comes on top off all the small-cap Chinese companies that have already been outed as complete frauds.

~ China Warning Sign #3: Imports

The latest trade figures from Japan showed a 14% drop in shipments to China. Most of the decline can be attributed to machinery deliveries. That means construction activity in China, which helped fuel a majority of its growth in recent years, is waning.

~ China Warning Sign #4: Manufacturing

In March, the HSBC/Markit Flash Purchasing Manager’s Index (PMI) hit a four-month low. The latest reading came in at 48.1, down from 49.6 in February. Keep in mind, anything below 50 signals a contraction.

~ China Warning Sign #5: Employment

On the heels of lower manufacturing activity, hiring dropped to a two-year low. How is the Chinese consumer supposed to fuel economic growth it they’re not employed? Just curious.

~ China Warning Sign #6: Government Debt

In America, we know all too well what happens when we overeat at the debt buffet. Banks need to be bailed out. And the engine of economic activity – consumer spending – grinds to a halt. Well, China’s the next country set to learn this the hard way. As of September 2011, China’s local banks issued 9.1 trillion yuan (or about $1.4 trillion) in loans to local governments. And local government debt, which is supposed to be illegal, now stands at about 25% of China’s GDP. Big whoop? It certainly is when that debt is being collateralized by inflated real estate.

~ China Warning Sign #7: Real Estate

After years of soaring prices, property values are now falling in China. Of the 70 cities tracked by the National Bureau of Statistics, prices fell in 48 cities in January and not one city experienced gains.

Gillem Tulloch, Managing Director at Forensic Asia Ltd. in Hong Kong, believes China’s real estate market is in the early stages of a prolonged downturn that will last up to three years. And it’s hard to argue with him given the glut of supply. Estimates for sold but unoccupied apartments – i.e. ghost housing units – range between 10 million and 65 million.

Courtesy  Louis Basenese  at Wall Street Daily (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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