Perfect Economic Storm for China:
Slow Growth and Rising Inflation
The second largest economy by gross domestic product (GDP) in the world continues to show a deepening economic slowdown. And while the Chinese economy has been grabbing financial media attention for a while, now another obstacle for the Chinese economy seems to have appeared
Inflation in the Chinese economy has become an issue that could escalate economic problems for the country. The Consumer Price Index in China rose by 2.0% in August 2012 from August of last year. (Source: Wall Street Journal, September 10, 2011.) While 2.0% inflation may not seem like a bigger number, keep in mind the government likes a target inflation rate of 1.8%. The big problem is food prices—they rose 3.4% in August from August 2011.
What does this mean for the Chinese economy?
If inflation in China keeps rising, the government’s intentions to ramp up the economy with monetary stimulus could be tempered. I still remember 2008, when attempts to boost the Chinese economy resulted in higher-than-expected inflation and a bubble in real estate prices.
China’s central bank has already cut interest rate in both June and July to promote economic growth in the Chinese economy—and I can’t say I have seen any improvements from these rate cuts in the Chinese economy yet.
Throwing more gas on the cooling fire, Chinese industrial output rose by only 8.9% in August compared to 9.2% in July. This is the lowest growth since the May of 2009. Similarly, imports that might suggest economic growth or provide a gauge of increased output are also decreasing. Importation of crude oil was down 12.5% in August.
Chinese exports are still in the slump—growing only 2.7% in August, compared to 1.0% in July—the increase doesn’t amount to much when last year the export growth rate was over 20%. (Source: Wall Street Journal, September 11, 2012.)
You might also be interested to know that exports from China to the European Union, once China’s biggest trading partner, were down 12.7% in August 2012 from last August. Because of the decline in exports to the eurozone, the U.S. has now become China’s biggest export market.
The data coming out of China show that an economic slowdown in the Chinese economy is become more visible.
The Chinese economy is seeing a slowdown—it is deepening and the Chinese government is trying to juggle its way to boost the economy. There has been increased fiscal spending and approval of new projects to boost the Chinese economy.
As I have mentioned before, any economic slowdown in the Chinese economy will affect the U.S. economy. Current indicators are suggesting a bigger downturn in the Chinese economy than economists (except me) had thought.
The European crisis is a problem itself. But with the U.S. becoming one of the biggest export markets for China, the question arises: is the U.S. economy growing enough to give China the export market lift it needs to grow? The answer is: of course not.