China: The difference between recession or depression
By Craig Russell
Over the past few months, we have witnessed the most concerted global effort in history to bail out the world economy. However in the process, more questions have been raised than answered. The impact of what started out as the subprime crisis has left many market watchers floundering in uncharted waters.
One of the biggest concerns is if we are in for a global depression. We believe that China will be the deciding factor between a recession or depression. The global financial system will be supported as long the Chinese consumer continues to spend at an increased rate.
Here’s why:
• According to the World Bank and the IMF, China is the world’s third largest economy with a GDP based on PPP (purchasing power of parity) at between US$6.9 trillion and US$7.05 trillion in 2007.
• The Chinese consumer accounts for roughly 42 per cent of GDP. Comparing it to the US and India whose consumption stands at about 70 per cent of the GDP, Chinese consumption still has room for growth.
• China’s GDP per capita is between US$5200 and US$5400 based on purchasing power parity. (Source: World Bank and the IMF)
• Q3 saw a net capital outflow of roughly US$1.5 billion from the mainland versus an inflow of US$170 billion in first half of 2008.
• The country has nearly US$2 trillion in treasuries and cash, 20 per cent of spending in the mainland comes from the central government.
It is safe to say that a recession and massive drop in consumer spending in the West, which has been on a ten year consumer spending and borrowing binge, has already begun. Third-quarter GDP for the United States declined by 0.3 per cent. Although much better than the anticipated 0.5 per cent, it is still a clear indication of a recession in the USA.
Despite the bleak outlook for the US, consumer spending in China is rising. In 2007, Chinese consumer spending in 2007 increased by 17 per cent compared to 2006, and 16 per cent in 2006 compared to 2005. There are concerns that the dip China’s GDP growth in the third quarter to nine per cent marks a slowdown in the economy. However, this should be seen more as a “moderation” in GDP and not a “slowdown”. It was the goal of the People’s Bank of China (PBoC) last year to moderate growth to the nine per cent level this year, and they achieved this aim.
It has been about 30 years since China embraced market reform. We now have a mature Chinese consumer with access to and aspirations to live a lifestyle similar to those of Japan, Korea or Singapore.
The Chinese household is moving to another level of spending. Gone are the days when basic needs such as food and shelter were the priority. We now see the demand shift to value added items such as electronics, household electrical appliances (white goods), automobiles and other luxury items.
The Communist Party of China recognises this increase in domestic consumer spending. On 29 October, the People’s Bank of China cut local interest rates by 0.27 per cent. This is the third cut since 15 September and more cuts are expected in the future. The spotlight is now on the consumer and domestic spending. We expect no movement or repegging of the yuan, with it remaining at 6.84 yuan to a US dollar, with the possibility of a one per cent increase or decrease over the next six to eight months. The stability in the currency will also contribute to stable prices on imports and exports.
In view of this, we should see consumer spending in the mainland continue to rise by 15 per cent over 2007. This would equate to about US$300 billion to US$400 billion in real spending.
Taking that into account, the Chinese consumer spending growth could equal 0.6 per cent to 0.9 per cent of the Global GDP, which stands at about US$50 trillion, and that is likely to keep the globe out of depression.
Craig Russell, Chief Market Strategist, Saxo Bank Group
November 7th, 2008 at 4:27 am
Thanks for a very logical, well-reasoned article. BUT I have to ask you about two caveats that I think may undermine your upbeat view. First, if the slowdown in China continues (mostly due to lack of US and Western demand for exports), the free-spending Chinese consumer may transform back into the tight-fisted Chinese saver. Second, if the severe recession in the US and Europe continues for more than a year, won’t it swamp the Chinese consumers’ ability to spend the world out of recession?
Thanks
-Andrew
November 7th, 2008 at 3:10 pm
Considering huge senseless loss of China overseas investment, housing slump as well as local impact due to WW economy down spiral, I’d believe that China is already in financial crisis, and it’s getting worse every day from local headlines.
The lawmaker must be prepared for the worst (yet to come), and be firm, proactive and clear on its foreign policy and collaboration with regional countries and G8.
November 7th, 2008 at 3:35 pm
Craig,
Would you be kind enough to direct me to reputable stat sources where I may find historical and current data on Chinese consumer spending, which you say accounts for roughly 42 per cent of GDP, and increased in 2007 by 17 per cent compared to 2006, and 16 per cent in 2006 compared to 2005.
My e mail address: jpthieblot@zba.ca
Thanks in advance!
J-P T
November 7th, 2008 at 5:06 pm
Hradly to see an article like this (so positive about China) on Western media.
It’s really hard to say China can be a world saver, but obviously many part of the world is eyeing on China and has some expectations which they never thought before.
May wisdom, power and time demonstrate. I wish to see China to grasp opportunities to play more important role.
November 7th, 2008 at 9:17 pm
First. There is not going to be a depression. To talk of a depression one would have to believe that the global monetary framework is going to collapse. And that is simply not the case. People need to keep this “credit crisis” in context. It is a $1-$2 Trillion dollar problem whereas the USA is a $14 trillion economy. They have budgeted 5% GDP of government intervention. Now the context. The 1989 Savings & Loan crisis collapses more banks then we are currently seeing. The US government intervened at the time with a 6.5% GDP bailout. The actual cost was 3% and ultimately the government made money on the deal.
My second point is that few people are considering – or understanding – that oils unjustified climb to $145 barrel is more to blame for the global recession then the “credit crisis”. Oil is now responding to the slowing economy consuming less oil and is currently struggling to hold at $60.
Funds, lower interest rates and lower energy costs will eventually work into the system and provide the foundation to start growing the economies again.
All statistics with regards to the future spending habits of consumers have a very short life span and looking out more then months at a time maybe to ambitious. With that said, China’s consumers will buy more but it is likely to be able to make up for any significant drop from exports.
Looking out farther, we could see a return fo global economic growth coupled with increased China exports and increased Chinese domestic consumption. This would be renewed upward pressure on commodities, and energy.
Over the next several quarters look for increased pressures from all countries to have the Chinese stop deflating the Yuan.
JR
November 7th, 2008 at 9:20 pm
Sorry… my comment above should state:
With that said, China’s consumers will buy more but it is unlikely to be able to make up for any significant drop from exports.
November 7th, 2008 at 11:07 pm
Very Interesting but to say global is to big. Panama is in th globe and we don’t have recession or depression our economy is booming.
November 8th, 2008 at 2:27 am
Margarita – very good point. There will be positive GDP in many countries. In fact, the IMF today announced revised projections for 2009, and expects developing and emerging economies will continue to lead growth in the world, increasing 5.1% in 2009. That is down from a forecast of 6.1% projection the IMF made in October. So though it is a positive number it represents downward revision. Keep in mind that this downward revision has been made in just 4 weeks and one wonders if another downward revision will come in another month.
In the same revised the IMF stated global growth would slow to 2.2% in 2009, down from the 3% cent forecast made last month. By definition, world growth under 3% is considered a global recession.
For those that wonder why the powers that be in the USA are reluctant or at least mixed in stating that the USA is in recession… it is because some look beyond defining a recession as simply two consecutive quarters of negative GDP to a more broad definition that takes into consideration real GDP, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales, as well as consumer confidence. Dont ask me what the formula is though. ;)
Its going to be a painful adjustment for most. Fortunately it will not last forever and we will come out stronger for it and see a new economic growth cycle in clean energy, cleantech etc.
JR
PS. Sorry for the long post again.
November 8th, 2008 at 3:33 am
Craig, I like that you make use of the data to support your argument, but I would like to bring to your attention few places where the logical link does not appear to be particularly strong:
1. Why would you use PPP-adjusted GDP rather than nominal to assess China’s impact on the world economy? A trader in New York does not care how much a Big Mac costs in China vs. other countries – for him a dollar is a dollar, it’s a flat playing field. China’s nominal GDP was $3.3 trillion in 2007, 6% of world’s.
2. Assuming Chinese consumer spending accounts for 42% of GDP compared to 70% in USA and India does not objectively indicate that spending has pressure to grow in real terms. The easiest way to grow this number is to decrease investment, export, and gov. spending (i.e. consumer % = GDP/(GDP- investment- net exports- gov. spending)). In fact, investment and net exports are declining in China today, and because of this the % of consumption will indeed grow, but will not be an indication of strengthening of the economy. I think it’s an inappropriate metric.
3. Not sure how you got to $300-400 billion increase in consumer spending at the end of the article. It has to be nominal as otherwise you cannot compare it with world nominal GDP of $50 trillion. My calculation looks like: $3.3 tr. nominal GDP * 42% consumer spending * 15% growth = 200 trillion. Even without doing the calculation, to assume that the increase in consumer spending can reach 400 trillion, i.e. 10% of today’s GPD is a bit optimistic (i.e. it would be nearly the same as consumer spending+gov. spending+investment+net export increase in previous years).
November 8th, 2008 at 5:39 am
I should add that with regards to China their GDP forecast was also still positive but adjusted downward from 9.3% to 8.5%. Some are predicting a further drop to 7%. Each new forecast predicts slower growth then the proceeding forecast. The Chinese government views 8% to be imperative. Anything slower does not create enough jobs and leads to concerns of civil unrest.
JR
November 8th, 2008 at 1:13 pm
Hello everyone. It is very interesting to read the thread of discussions. In my humble opinion, China economy/GDP is strong, but the fundamental is of concern.
The China stock market has loss approx. 70% of the value since the begining of this year. The domestic property market begining to experience “bubble” effect. Many banks are holding properties morgaged by investors (or speculators) which is now has negative values.
Chinese government is trying hard to prop up the stock market, and to stablize the property market. A few days back, China central government has announced measures to spend hundred of billion RMB on domestic infrastructures.
My sincere hope all these measures are effective and would not only help to increase consumer confidence (and domestic demand), it would also help the rest of Asia countries and the world.
I believe we would see the outcome by mid of 2009. I am crossing my fingers.
November 10th, 2008 at 6:12 am
Today’s stimulus package will help.
http://news.bbc.co.uk/1/hi/business/7719042.stm
JR
November 10th, 2008 at 10:09 am
Yap, the China stimulus package is huge, but the key is to execute and implementing it. Hence I predict we should see the outcome by mid next year.
November 10th, 2008 at 10:54 am
Economy and depression, interesting topics, good article, some remarks not supported by any numbers:
While there are many official numbers around, reliability always has been an issue in China. It is interesting to see this is also an issue in the US. If people claim there is still not a recession in the US due to “definition” it makes me wonder where they have been locked up in the past year or so.
Economies grow and contract, the world economy still grows, although it is slowing it does not mean we end up in depression. In China, growth is still there and although factories close and people get unemployed things will turn, people will find new work, especially in an economy that grows 8% or so.
We should become a bit more sensible and not so emotional. If we all follow the news, yes, we are in for a big recession or even depression. I believe it is the same “news” that some time ago was reporting on unpreceded growth and other “positiveness” that led us to buying houses, stocks etc etc. “What you think is what you become” is very true, so let our thoughs not be led by the news.
Going back to the article, I hope the Chinese consumer is NOT the main hope for the world to prevent recession or even depression. Why? Chinese people are and have been good at saving and for good reason. The economy is one of them and it means people will now start saving more if they can. I am not negative towards the Cinese customer, on the contrary, many in the US / Europe can learn from their Chinese counterpart.
I do hope that the Chinese consumer will be a contributing factor to the world not ending in depression as this will show their confidence in the future.
November 10th, 2008 at 11:40 am
Consumer spending will increase in China ?
….not too sure of it, but what I see is a glut of products that were first aimed to exports and now turned inwards, and driving down prices leading to opportunities creating a ‘temporary’ increase in consumer spending.
Next I think that ideally many factories should review their sales and marketing strategy and readapt to the new situation, moving out is one option for some, bringing the source nearer to the consumer base……many are already doing so.
November 11th, 2008 at 2:48 pm
China is very different from the U.S. in the way that it does not have debt, neither its government nor its consumers.
Its government can afford to increase its spending on infracture, low cost housing, health care, etc. to stem the slide of economy.
Its consumers have lots of cash sitting in the bank. The increased need for cars, luxury goods, tourism, non-speculative housing will continue.