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Another Bubble in the Making…

china-economyChina is under growing pressure to further stimulate its economy after disappointing data showed another heavy fall in factory-gate prices and a global slump in exports. Producer prices in July hit their lowest point since late 2009, during the aftermath of the global financial crisis, and have been sliding continuously for more than three years.

China’s central bank is likely to further cut interest rates again, having already cut four times since November 2014 in one of the most aggressive easing in nearly seven years. The gloom may only deepen in the coming months with a raft of economic data forecast to show renewed weakness in factories, investment and domestic spending.

The world’s second-largest economy is officially targeted to grow at 7 percent this year, still strong by global standards, but some economists believe it is growing at a much slower pace.

The producer price index fell 5.4 percent from a year earlier, the National Statistics Bureau said on Sunday, compared with an expected 5.0 percent drop. It was the worst reading since October 2009 and the 40th straight month of price decline. Falling producer prices are worrying because they eat into the profits of miners and manufacturers and raise the burden of their debts. China’s corporate debt stands at 160 percent of GDP, twice that of the US.

In line with the sluggish economy, annual consumer inflation remained muted at 1.6 percent despite surging pork prices, in line with forecasts and slightly higher than June’s 1.4 percent. A cooling housing market, uneven exports and weak investment have cooled annual economic growth, which will be slowest in a quarter of a century even if it hits Beijing’s target this year.

A strong yuan policy – designed in part to support domestic consumption and help Chinese firms to borrow and invest abroad – is hurting exporters. Trade data showed depressed demand from Europe and the first drop in exports to the US, China’s biggest market.

Chinese firms have laid off workers for 21 consecutive months as they slash prices to a six-month low to attract customers. China’s turbulent stock markets, which have fallen by almost a third since peaking in June, also add a new sense of urgency for top officials as they try to ensure a stable financial system can fund Beijing’s efforts to rekindle economic growth.

Yet, even the central bank has warned that looser policy may not be effective in lessening the pain felt by companies. Companies are holding back on spending amid a reluctance by banks to lend due to rising bad debts. Could the Chinese economy be another “asset bubble” in the making; if indications are right, probably bigger than the US sub-prime crisis.

 

Contributed By:
Dr. Subir Sen
Dean – Globsyn Business School

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