CHINESE “WALL” CRACKS

The debt crisis in Europe since 2008 has loosened even the solid economic framework in China and it seems that has formed a crack - the second in the world after the US economy is in deep decline.

Over the past 30 years, China's economic growth has averaged 10% per year. If in 2009-2010 the country could still more or less successfully resist the negative impact of the situation in the euro area, starting from 2011, the "locomotive pulling the global economy out of crisis" he began to slip. The GDP growth in the third quarter of 2012 was the lowest over the past 3.5 years. As reported by the National Bureau of Statistics of China, this quarter GDP increased by 7.4% (in the second quarter by 7.6%) compared to the same period last year.

The "soft" landing

According to the data the National Bureau of Statistics and the Federation of Logistics and Purchases published on 1 October based on a survey of the largest 820 companies from 31 industries in China, the index of business activity in the industry, PMI Manufacturing, continued to slip in September and was 49.8 points, which was the second in a row value below 50% .

The second largest economy of the world is increasingly slowing down, but so far this is a controlled "soft" landing. On top of all, the experts of the World Bank downgraded the growth outlook of China's economy, and with it the entire region of South-East Asia. While in 2011 GDP increased by 9.3%, this year, according to the World Bank, the increase will be 7.7%.

The drop in demand for Chinese products abroad and falling investment constitute a heavy load that pulls back the country's GDP. The growth rates of exports and imports in the structure of the balance of trade of China is close to zero. At the same time, investment in the country continues to decline too. According to the Ministry of Commerce of China, declines in foreign investment continues for the third consecutive month. Despite the fact that China has huge foreign exchange reserves ($ 3.2 trillion) using them to stimulate the domestic market is fraught with a new round of inflation. In addition, the money is in foreign, especially American, bonds. In the second quarter of the foreign debt rose by $34 billion and reached $ 785.17 billion. Domestic debt is no less impressive. According to the Industrial and Commercial Bank of China, the national debt at the beginning of March 2012 was $ 2.78 trillion, or 43% of GDP (for comparison - in 2010 it was $ 1.03 trillion.).

We cannot say that the government, as some European experts maintain, is watching all these phenomena" with the Oriental calm". Since June 2012 the Central Bank's discount rate was halved, which helped to reduce the burden on the private sector. Also the requirement for the amount of bank reserves was slashed almost three times over. In order to revitalize the economy the Chinese government announced the investment in infrastructure projects to the tune of $150 billion

The Chinese authorities' efforts to stimulate domestic consumption, it seems, are paying off. The industrial production in September this year increased compared to September 2011 by 9.2%, while retail sales increased by 14.2%. However, signs of recovery of the Red Dragon are still not convincing enough to reassure its partners around the world. The Chinese, too, lack much optimism about improvement of the situation. Deputy Minister of Commerce Zhong Shan told reporters the following: "It is projected that no significant improvement in the economic situation in the EU is expected. We can not be optimistic about the prospects of bilateral trade." For example, China's exports to Europe in August fell by 12.7% compared to 2011, and this is for the third month in a row. "The slowdown in China has been more extensive and prolonged than expected. The situation is completely different from what we saw a few weeks ago, "- says senior economist of Asia Sentry Advisory, Glenn Magua.

Impact on the world

Although in itself the question "what threat does the economic slowdown in China pose to the rest of the world?" seems illogical, as has been said, China is the second largest economy with the population of 1.340 billion people. Therefore we will still try, based on statistical data, to determine the potential impact of the crisis in that country on its economic partners.

One of the largest American Sinologists, John Fairbank (1907-1991), called China "a dream of journalists and a nightmare of statisticians, where one square mile has more human tragedies and less reliable facts, than anywhere else in the world." Today, many Western economists to analyze the state of the economy China cite Fairbank, in all probability, in order to insure their predictions for the future.

In the early 80-ies of XX century China, despite the huge number of people, occupied a modest niche in the global economic environment. Over 30 years, the rapid development of China's economy has created a genuine miracle, made impressive progress and entered the world's elite of developed countries. European and US markets have generated a huge industrial machine with incredible performance. However, the boomerang returns, and now the global importance of the Chinese economy turns its local structural problems into global ones.

It is an axiom - the decline in the rate of growth of the Chinese economy means reduced export orders for the rest of the world. Potential impacts on the strongest economies in the world - in Europe and the United States - is not abstract, but quite palpable. For example, Nike company said its stores in China are already filled with goods. McDonald's, Caterprillar, Procter & Gamble Co In find themselves in a similar situation...

The rapid growth of the Chinese economy over the past 30 years, wage increases and unchecked growth of bank loans have generated a giant real estate market. And the fall in the Chinese real estate market has become a global problem. Indeed, according to a study by GK Dragonomics, in 2012 the construction market of the Asian giant formed 40% of the world steel demand and 10% of the demand for copper. Naturally, the reduction in demand from China will be a painful blow to producers and result in a fall in steel prices, iron ore and coal. For the first time in 3 years the world's leading mining British-Australian BHP Billiton reported a decline in net profit by 34.7%.

One can cite many examples of the negative impact of China's economic growth slowdown on the world economy. Attachment to external markets, dependence on external sources of energy with the onset of the global crisis have exposed many of the problems that were not visible in the years of rapid growth.

One thing is clear, the economy which pulled the global economy for a few difficult years is itself turning from a doctor to a patient. And it seems that the country needs not only in economic but also political "cures".

At the September meeting of the heads of "EU - China" Brussels hoped that Beijing may make greater use of its vast gold reserves to improve the situation. Vimal Popat of Market Securities writes, "China is the second largest trading partner of the EU, but the EU is the largest trading partner of China. Also, let's not forget that the lion's share of foreign exchange reserves in Beijing (about 25%) is stored in the euro".

Thus, it is clear that to maintain its own economy China will still have to fork out. In November, the Congress of the Communist Party of China will be held and there should be a change of the government. A change in the political course policy is not on the cards, but the world is waiting for more decisive steps for the recovery of the second economy in the world.