Saturday, August 7, 2010

CHINA-SLOW DOWN IS BETTER.

The Chinese economy was the first economy to show the hope of recovery when the world economy came to an end. Chinese stimulus package led the hope of fire run across the world as the FIFA CUP 2010 was made roaming across the World. The world economy got the first relief with the GDP numbers showing signs of growth came from the Chinese economy.

A year after the story stands out to a different place where China is again the nightmare if its GDP growth slows down. China through its economic policies and efficient execution of its planning made the GDP to climb the Ladder of 12% growth. The economy not only surged but also sparked fears of assets bubbles which happened as default reflection of higher growth of GDP. Chinese economic growth raised the fear of a bubble burst out but the Chinese government policies were again so efficient that it controlled the asset bubbles and saves the not only Chinese economy but also the world economy from a massive fall which is yet to come out from its worst phase.

Recently the Chinese economic data came out which have shows that china is under stringent control due to which the manufacturing and the overall economic growth of china is under control from internal perspective but fearful from outside eyes.

The HSBC China Manufacturing Purchasing Managers Index, compiled by Markit, dropped to 49.4 from 50.4 in June -- falling below the all-important 50-point level that separates expansion from contraction. China Federation of Logistics and Purchasing fell to 51.2 down from 52.1 in June -- also marking a slowdown in manufacturing activity. The PMI covers more than 730 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics, while the manufacturing output index reflects a comprehensive index of manufacturing activity by the new orders, production, inventory and finished goods inventory. The below chart shows the GDP growth of China and its current statistics.

The output index for automobile products, cigarettes, rubber product manufacturing fell to below critical point whereas the index for textile, garment and fir product, metal product, general equipment output managed to maintain stable growth. Manufacturing surveys from other big emerging economies India and Russia served to bolster investor sentiment, with Asia's third-largest economy marking its 16th month of expansion. The US manufacturing sector grew in July for the 12th straight month, providing a boost to the slowing economic recovery.

China is very much affective in its policy implementation. It doesn’t follow the blind policies adopted by US and other western nations. We have been hearing about the possible threats of collapse in the housing market of China. Chinese housing market is as equivalent in size as compared to the manufacturing In other words Chinese economy have two wings two to make its GDP fly high. One is manufacturing the other one is real estate.

Chinese stringent policies made the real estate to cut back its growth by almost 60%.This might shock any nation since fall of 6o% in prices will lead to slow growth of the economy and another instance of subprime mortgage failures. China is very much well prepared in its policy frame work. Chinese regulators are demanding that the nation's banks undergo stress tests which include being able to survive a 60% fall in house prices. Despite of such a dramatic plummeting the business confidence level among the Chinese economy is climbing very high and showing sign of more growth to come in coming years. The below chart shows the chinese business confidence.This shows that how they are making their own test within the good time frame work so as not to make their economy face any hard days and nights.

After the test the Chinese real estate sector will again spark since the prices have already touched the lower levels and the report of test will spark the next momentum. Moreover the government will do any thing in the next remain period of this year to boost up the sector growth. Otherwise the sector and the Chinese economy will face the consequences of foreign investment would be rapidly curtailed, domestic lending would be slashed and demand out of China for Western commodities would fall fast.

Before I move further I would like to know is India having any such system apart from interest rate hikes which have become a common play for Indian economy.

China is not only having the stress test of banks for real estate segment alone. It have extended the test for all those sectors which are entangled with real estate-cements, steel and building material. On the other hand the major Chinese banks are raising billions of dollars in new capital under orders from regulators to strengthen their balance sheets after lending a record 9.6 trillion yuan ($1.4 trillion) last year in support of Beijing's stimulus. This reflects that the economy is having adequate supply of liquidity within its streets. One part of the slow down is that its very advantageous to have s lower economic growth rather than entering the tunnel of crisis and pulling other economies in to the hole of collapse. China is also abiding the green revolution and energy revolution. Its manufacturing cut backs have helped china to manage the energy environment efficiently. The slow down is better than a prolonged collapse.

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