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Businesses bleeding as China loses steam

Publication Date : 22-05-2012

 

After Wang Jihong's trading firm, which has been struggling to export textiles to markets like Europe and South America, eked out a tiny profit in the first quarter of this year, she hoped the worst was over.

Then came April. Europe's debt crisis intensified and China's economic activity unexpectedly weakened, raising concerns the world's No.2 economy may be in more trouble than most thought.

Wang, 46, started to see her business bleed red ink.

"Our orders dropped to half from a year ago, mainly because overseas orders fell significantly... while export prices have fallen."

But at least her company, based in the fast-developing western city of Chongqing, has not collapsed yet - unlike "a lot of textile producers around here", she said.

From more failing companies to new data suggesting that industrial output, property and other sectors risk slowing to 2008 crisis levels, signs are that one of the global economy's key growth engines is losing steam fast.

Analysts are saying China faces a rougher road to recovery than expected.

"The turnaround is likely to be slower than the market thinks," said Eric Fishwick, investment group CLSA's head of economic research.

Various think-tanks are now discussing the prospect of a recovery in the second half of the year, rather than in the second quarter, he noted.

Even now, April's electricity output - often seen as the most robust indicator of the industrial economy - has set alarm bells ringing.

Growth in power output, which usually outpaces the underlying economy's momentum, reached only 3.7 per cent in April, a time when it normally surges to double digits. It is also the slowest in the past 16 months.

This, combined with April's appalling economic data, is cause for concern, according to Capital Economics chief Asia economist Mark Williams. "Our estimates suggest that growth has slowed towards the levels seen at the depth of the financial crisis."

Last month, factory output fell to its lowest level since the 2008 global financial turmoil.

Foreign direct investment dropped for a sixth month, the longest stretch of declines since the crisis.

And the outlook for China's foreign trade, which disappointed market expectations, 'will remain fairly severe in the months ahead', Commerce Ministry spokesman Shen Danyang warned last Tuesday.

Still, China is expected to hit its 10 per cent trade growth target this year, he added.

Despite Shen's brave front, UBS analysts revised their forecast for China exports downwards from 10 per cent to 7 per cent. This is in the light of "the ongoing trouble in the euro zone and the weakening demand in key emerging markets", noted UBS economist Wang Tao.

To Beijing-based men's clothing distributor Huang Enci, in his 20s, it feels like growth has stalled. "I'm nervous that I'll have few or no orders for the next few months. My partner has quit; I'm working alone."

That worry was reflected in a recent Chinese central bank survey showing that business confidence in the economy has fallen for three straight quarters to 39.2 per cent.

The 50 per cent mark divides optimism from pessimism.

Meanwhile, investment in the real estate market, which makes up 13 per cent of China's gross domestic product (GDP) and impacts more than 40 other sectors, also slowed to a single-digit level for the first time since the crisis.

Experts like Tsinghua University professor Patrick Chovanec warn that falling property investments may erase several percentage points of GDP growth this year.

Not surprisingly, some of the 60,000-odd property developers in China have been among the worst-performing listed firms so far this year. Real estate group China Calxon estimated its half-year loss could be 350 million yuan (US$55 million), a staggering drop from a 7.2 million yuan profit in the same period last year.

Calxon blamed this partly on poor project sales. For similar reasons, three small developers have filed for bankruptcy recently.

More may go belly-up as jittery home-seekers like Beijing- based human resources manager Laura Du, 29, hold off purchases.

"My fiance and I wanted to buy a place before our wedding this year. But now we've decided to rent in case the market crashes."

A government think-tank said last Friday that second-quarter growth may drop to 7.5 per cent, from 8.1 per cent in the first quarter. This would be the slowest since the first quarter of 2009.

And for the full year, the economy may expand 8.2 per cent, the slowest since 1999, a Bloomberg survey earlier this month showed. Still, this is well above China's annual target of 7.5 per cent.

Beijing appears tolerant of slower growth, which may allow more room to steer the economy to a more balanced growth path.

While some have criticised it for being slow to react, others say it has to tread carefully to keep growth and price levels stable.

"The Chinese government is paying more attention to higher-quality growth, that's the reason why it has not launched a massive stimulus policy so far," Li Ang Securities analyst Zhang Yaojing noted.

 

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