China's "Transition"

by Laura Ehrenberg-Chesler on September 13, 2012

in Foreign Markets

In the Monday morning edition of our research from Ed Yardeni, he describes the challenges China is facing in transitioning from export-led economic growth, to domestic-led economic growth. I thought the analysis was thought provoking, and wanted to share it here on our blog, since China has been a major engine of growth

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for the global economy over the past few years.

China’s Transition. China’s transition from export-led growth to domestic-led growth might not be easy and could be disrupted by major social unrest. This is a very big concern among our London accounts, particularly those who frequently visit China. They told me that Chinese officials expected to have plenty of time to make the transition. However, the sudden slowdown in China’s exports–mostly attributable to the recession in Europe–is forcing China’s leaders to scramble to boost domestic growth. Their immediate reaction over the past two years has been to raise minimum wages. That’s crushing profit margins, which tend to be razor thin even when all is going well.

So now companies are scaling back their hiring. China’s industrial production rose 9.0% y/y during August, but that’s the lowest pace since May 2009 (Fig. 9). Railways freight traffic plunged 12.4% over the past four months through July to the lowest level since February 2011 (Fig. 10). All these developments certainly explain why the Shanghai-Shenzhen 300 stock price index dropped last Wednesday to the lowest readings since March 3, 2009. On Friday, it rebounded by 5.3% on news that the government approved 25 new subway and inter-city rail projects worth $126 billion.

If we can get our own economic house in order this may not impact the domestic economy as much as might be feared. However, it is something we will watch closely in the interim.

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