Blog You Can Bank on China’s Slowdown
China’s leaders are “obsessed with social stability”, which means an end to the excessive production and debt that fueled its rapid rise over the last 30 years, with a new focus on consumption and services.
“Growth has never been the primary directive of the Chinese Communist Party. It has always been stability,” said Charles Chang, Head, Asia Credit Strategy, Credit Suisse. “The slowdown is inevitable. It’s not a risk, it’s a certainty.”
Actually, deindustrialization began back in 2008, but the resulting hit to the economy was too much to stomach for Beijing, which countered with massive, if not always advisable, infrastructure projects.
“They built windmills where there is no wind,” said Dong Tao, Chief Economist for Non-Japan Asia, Credit Suisse. “They dug a deep hole. Now China needs to pay in coming years.”
The current slowdown will be actively managed by the central government to minimize any social disruption that could come from rapid job losses.
“Anything related to (manufacturing) is going nowhere. But the service sector is creating the jobs that the manufacturing sector is losing,” Dong said.
Just this week China posted its slowest manufacturing output in 11 months, amid its slowest overall economic growth in a quarter of a century.
Other significant adjustments await, including a possible housing market realignment, with excessive prices in Beijing and Shanghai and excess supply in Tier 3 cities.
The slowdown in construction will be bad news for commodities producers. Chinese steel production could drop by a third, and the coal-fired plants that powered its expansion will give way to cleaner electricity sources, in a bid to reduce pollution.
Mining-heavy economies, such as Australia’s, could be in for a rough ride. Dong expects the Australian dollar to fall to 60 cents against the U.S. dollar, from about 78 cents today.
“The Aussie dollar is in trouble,” Dong said.
The Renminbi could also be headed lower, Dong added. “The People’s Bank of China (PBOC) would never admit it, but the PBOC is moving away from pegging the RMB to the USD, and to pegging it to a basket,” Dong said. “The exchange rate is going to weaken. The central bank is deliberately trying to engineer something.”