Why the Chinese Economy’s Showing More Cracks

Why the Chinese Economy’s Showing More CracksThe state of the Chinese economy continues to trigger some heated discussion, specifically concerning the immediate need for more stimulus to drive domestic consumption in China. (Read “China Scrambling for Economic Remedies.”)

China faces declining demand for its goods from Europe, the U.S., and other key trading partners, as the global economies continue to face stalling consumer spending. The country’s gross domestic product (GDP) has declined in six straight quarters. GDP growth came in at 7.6% in the second quarter and is estimated to hold at below 8.0% in the third and fourth quarters. JPMorgan Chase & Co. (NYSE/JPM) cut its estimate for China’s 2012 GDP to 7.7%.

The cracks in the Chinese economy appear to be expanding. The slowing is evident in the country’s exports that 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 for Chinese goods. Chinese imports increased 4.7% in July, which indicates Chinese consumers are continuing to spend but at a slower pace.

In addition, China’s industrial output grew at 9.2% year-over-year in July, representing the lowest increase in over three years, according to the National Bureau of Statistics.

The positive is that economists believe manufacturers are cutting back on inventory in China in response to the lower demand, but inevitably, industrial output will need to rise to replenish inventory levels. It is unknown when this will happen, but there are some signs of a pending rebound.

Looking at electricity usage helps to give us a sense of what is happening, as it is often used as a gauge of economic growth. In July, a total of nearly 454 billion kilowatt hours of power were generated in China, up from 393 billion kilowatt hours in June. It is key that this usage continues to ramp up in the months ahead, as China offers added stimulus.

The Chinese government will have no inflation issues to deal with, as it ramps up its spending programs. Chinese inflation is at a 30-month low.

Yet after cutting the reserve requirement ratio for banks and twice cutting interest rates this year, China’s economy continues to drift along, but is avoiding a meltdown so far.

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.

Unfortunately, making money from the equities market to fuel spending has proved difficult. The benchmark Shanghai Composite Index is in a bear market, down 1.4% this year, following declines of 21.7% and 14.3% in 2011 and 2010, respectively.

While China is no Japan, which is in a 20-year coma, the country will face difficulties as it pushes forward, due to global economic slowing and soft domestic spending.