The pie chart below shows China's export markets. In the past when developed market nations slowed down, China relied on its emerging markets clients (EM) for growth. No such luck these days. Emerging markets across the board are slowing sharply, as we saw yesterday with India (China's big customer).
|China export markets (source: DB)|
Clearly the EU isn't going to do too much shopping, Japan is struggling, and now we have clear signs of the US slowing down. China's economy will be coming to a grinding halt unless the government kick-starts a massive stimulus program. Today's manufacturing PMI number is starting to reflect the situation (although this indicator has somewhat of a lag, and the current situation may be getting worse).
HSBC: - “May’s final reading confirmed that manufacturing growth slowed further on weakening demand from both global and domestic markets. This points to a continuous slowdown of the real economy in 2Q and should promote Beijing to step up easing efforts in the coming months. On top of monetary easing via additional RRR cuts and one 25bp rate cut, Beijing policy makers should allow fiscal measures and private investment to play a bigger role in supporting growth.”At the same time China's government is facing a crisis of confidence within the Communist Party.
Bloomberg/BW: - After China’s economy grew at the slowest pace in almost three years last quarter, the government’s anxiety may extend beyond the Bo scandal. Premier Wen Jiabao said in a March speech that the regime could come to an end if it doesn’t address corruption.This economic slowdown is likely to fuel more social unrest, particularly as the anniversary of Tiananmen crackdown approaches.
Days before Wen spoke, Bo himself warned that China’s Gini coefficient, an index of the income gap, had exceeded the 0.4 mark that is used as a predictor by analysts for social disturbances.
Bo, once considered a candidate for the Politburo’s all- powerful Standing Committee, was stripped of his post as party secretary of the municipality of Chongqing later in March. A month after that, following accusations that his wife was involved in the murder of a British businessman, Bo was suspended from the Politburo.
“The party has control over millions of police, the secret police, the web police, the informers, so in a material sense its grip is very solid,” said Minxin Pei, a professor of politics and government at Claremont, California-based Claremont McKenna College. “In a psychological sense, the party’s grip is very tenuous. People say, ‘Wow, its own leaders are both corrupt and insecure, they have no confidence in the long-term survival of the regime itself.’”