Why China’s in Big Economic Trouble

Big Economic TroubleThe state of the Chinese economy continues to ramp up some heated discussion, specifically concerning the immediate need for more stimuli to drive domestic consumption in China. (Read “China Scrambling for Economic Remedies.”)

While inflation is manageable at a 30-month low of 1.8%, China’s industrial production continues to be a sore spot compared to the sizzling results from 2003 to 2006. As you can see, industrial output improved from 2008 to 2011, but the current year is heading for the lowest levels since when the global recession started in 2008. (Source: CIA World Factbook.)

And while the Organization for Economic Cooperation and Development (OECD) predicts China will grow its economy by 8.2% this year and rebound to 9.3% in 2013, I doubt these metrics will be achievable. JPMorgan Chase & Co. (NYSE/JPM) has a 7.7% target for China’s 2012 GDP, which is probably more likely what the gross domestic product (GDP) growth reading will be.

The country’s GDP has declined in the last six straight quarters. GDP growth came in at 7.6% in the second quarter and is estimated to hold below eight percent in the third and fourth quarters

The facts are out there. With the eurozone and Europe in a comatose state and fighting high debt loads and muted growth, demand for Chinese goods will decline and China will suffer.

The cracks in China’s economy appear to be growing faster. The economic slowing is evident in the country’s exports that only edged up a muted one percent in July, which is well below the average eight percent estimate, according to a Bloomberg survey. This weakness clearly suggests the global decline in demand for Chinese goods. Chinese imports increased 4.7% in July, which indicates that Chinese consumers are continuing to spend but at a slower pace.

China’s HSBC purchasing managers’ index (PMI) indicated that the country’s new export orders declined at the fastest rate since March 2009.

There is also concern mounting over whether Mexico will take market share away from China in the manufacturing of cheap goods. Mexico’s wages are just slightly above China, where wages have steadily moved higher. Mexico also has plenty of manufacturing capacity, and more importantly, the country is located beside the U.S., making shipping costs for containers much cheaper to ship from Mexico than across the Pacific Ocean.

The Chinese government has lots of work ahead of it. The cuts in reserve-ratio requirements and interest rates have yet to help convince consumers to spend.

I expect the country to continue to introduce new capital into the economy, but at the end of the day, Chinese consumers will need to reach into their pockets and want to spend.

While China is no Japan (a country in a 20-year economic comatose state), the country will face difficulties going forward due to the global slowing and soft domestic spending.