Has the adjustment time for China’s economy arrived?


After  the Shanghai stock market tumbled 8.5% on Monday, stock exchanges in the developed economies capitulated. China’s GDP accounts for 15% of global GDP, the second largest contributor after the US with 19%, while Greek GDP only represents 0.3% (Spain, 1.6%). The adjustment is serious and is a reaction to the eruption of China’s triple bubble: credit, real estate and stock markets.

Bankinter analysts think the Chinese growth model is not sustainable and it seems like the time for adjustment has now arrived. “It is not a short-term adjustment but something more serious.”

China has used all monetary policy measures (orthodox and unorthodox) to remedy the situation, but these have not been successful. Not even with 3 successive devaluations.

The slowdown of the Chinese economy is a worrying reality and not just a matter of market sentiment. Q1 and Q2 GDP growth was +7.0%, which is China’s official 2015 growth target since a downward revision in March from an initial +7.5% once it was confirmed that this level would be impossible.

Its Manufacturing PMI slowed to 50.0 in July from 50.2 in May and June. But the private record (previously calculated by HSBC and now by Caixin) was 47.1 in August, so still below 50 points (ie indicating economic contraction) since the 50.7 registered in February.

Without going any further, it was announced yesterday that during the first half of 2015 the aggregate utilisation rate of 23 significant car-making joint ventures dropped sharply below 100 percent for the first time: 94.3% vs 107.4% in H2 14.

Despite this bad data emerging on Chinese manufacturing activity, UBS analysts point out that we should remember services represent almost half of  GDP and are maintaining levels.  Caixin Services PMI improved to 53.8 in July. For UBS, the Chinese economy will slow down gradually this year, growing by 6.6% in Q4. They do not see “any hard landing” but a recovery in growth in infrastructure investment, given that this is an area where the government is taking action to offset the drop in activity.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.