Is China Losing Charm ?

The outlook on global uncertainty has been exacerbated by the recent Chinese data that highlights the economy’s performance over the last few months. The Chinese economy is driven by exports and manufacturing. Both these fronts are witnessing a slump due to the declining global demand and the weakening domestic demand. This has been negatively affecting China’s GDP with its first quarter figures slipping down to a three-year low of 8.1 per cent, down from 9.2 per cent in 2011 and 10.4 per cent in 2010.

Exports in China are bound to be on a low as a result of poor activity in the U.S. and Europe. The Federal Reserve cut its estimate for U.S. 2012 GDP to 1.9 per cent to 2.4 per cent from 2.4 per cent to 2.9 per cent in April. The central bank also said it sees little progress on the unemployment front during the rest of the year. There is increasing pessimism hovering around the European situation. Economies pivoting around uncertainty continue to lead the zone towards stagnation. These factors have been ceaselessly affecting the China situation over the last few months.

Recent data by HSBC Holdings Plc and Markit Economics showed the initial version of the manufacturing Purchase Managers’ Index drop to 48.1 from 48.4 observed in May, where a level of below 50 signifies weakening business conditions. This is the eight consecutive month of decline in China’s manufacturing which gives the economy an added reason to worry about. The sub-indexes of the PMI highlighted the reasons for this subservient growth.

Among these, new orders, new export orders, employment, output prices and input prices saw declines. These bring forward China’s internal issues and weak domestic demand as significant contributors to the sluggish figures. Property prices as well have been creating huge amounts of downward pressure. It is creating concerns over hampering growth if they fall too much.

To curb these pressures, China has been easing some of its monetary policies. The central bank, on Thursday, cut its benchmark one-year lending rate by 25 basis points to 6.31 per cent. This is the first time it has reduced rates since 2008. Inflation figures showed that the CPI for the month of May eased down to 3 per cent. This figure would support the monetary policy and create some room for a further rate cut to increase liquidity and boost growth.

Over the past one year, the deteriorating condition has resulted in a 14.58 per cent drop in the Shanghai Composite Index bringing it down to 2,260.88 from 2,646.48. On the same lines, the Shenzhen Composite Index is down from 953.95 in the previous year to 943.06, resulting in a fall of 13.38 per cent. Growth estimates were adjusted by economists last week where Credit Suisse Group AG brought it down to 7.7 per cent from 8 per cent. Deutsche Bank AG too reduced estimates to 7.9 per cent from 8.2 per cent.

Clearly, the appeal that China brought about to the global markets, promising unprecedented growth and potential, is becoming questionable. China is not only facing the burden passed on by a melancholic performance globally, but are also facing structural issues which require fiscal and monetary action to result in stabilisation.

 PMI For China Over The Last 8 Months