Three Tells for the Chinese Economy

When talking about global economic powerhouses, China is one of the first names that people utter. But China’s ascendency has not come without cost to pollution, standards of living and a very quick urbanization of its population.

You may think it’s Paris, but it’s really the city of Tianduncheng, made to look like France. Today, it stands utterly empty.

The question on everyone’s mind is whether or not China can continue this meteoric rise, or if the country is headed for trouble.

What does it mean for consumerism, the world economy and industry in general?

It is an elusive and difficult question to answer, and many have differing opinions. The reality of where China’s economy is going lies in three primary areas.

 1) Purchasing Manager’s Index.

The widely used Purchasing Managers Index, or PMI, provide a comprehensive snapshot as to whether China’s manufacturing sector is expanding or contracting. In summer, 2014, the Chinese PMI was at a two-year high, and the reaction in the U.S. was that momentum was gaining, and the good times had returned.

Then along came November, and the Purchasing Manager Index used by HSBC was at a six-month low; 50. The rating system considers anything below 50 a contraction; everything above 50 denotes expansion. Indeed, we felt it in the 3PL industry as exports from China to U.S. were way down in November, further supporting the idea that we are not yet economically out of the woods.

So what happened? The tell-tale sign is at China’s factory level; The PMI fell below 50, and the momentum for the first half of the year vanished.

 2) The New Normal: 2015 GDP target falters as slow growth abounds.

If it were not bad enough, the marketing geniuses have re-applied the phrase, ‘The New Normal.” It is now being used as a way to describe the effect of re-targeting projections as a result of a faltering GDP due to slow GDP. In China, this reason is often used and has recently been seen in the state-run People’s Daily, as well as in statements made by Chinese officials. It becomes a means by which to justify that a slowing growth is more sustainable in the long run, and, therefore, has greater acceptance.

Therefore, “The New Normal” has put forward an ominous task and placed a significant test at the doorstep of the Central Government: whether to reduce its’ 2015 GDP growth from 7.5% to 7%. General opinion, anonymously so, agrees China will do so. However, the real questions are how can China’s economy skyrocket into the world’s second largest and produce a mature enough economy to provide jobs for 1.2 billion people. All while reducing the growth rate to the slowest in twenty-five years?

Seen as a positive is that the so-called “tertiary industries”, consumer or service based industries in China, have surpassed heavy industry by close to 50% of GDP. There is a downside; consumer industries require more labor than heavy industries. Therefore, no doubt the goal of top Chinese officials last year was 10 million new jobs a year; a claimed goal achieved in September, 2014.

3) Stock prices gone wild.

The stock market can be an awfully lonely place when used as a way to gain insight into a bigger economic picture. For example, record highs for U.S. stocks versus lukewarm U.S. economic data are a real-life example. However, there is a real life relationship that stocks have on one’s home market.

At least in the U.S., the markets continue to show that everything is going to be just fine – this mantra has been going strong since 2009.

Now China’s stock market seems to be saying the same thing as well. The Markets in China remain volatile, as the Shanghai Index remains off-peak by 50% since 2007.

So, investors are using leverage to augment risks, endorsing the opinion that China will not suffer too much in spite of slower growth.

Hopefully, they are right…