[credit provider=” Marco Bellucci via Flickr” url=”http://www.flickr.com/photos/marcobellucci/1741470405/”]
China’s economy is in the midst of a slowdown, which is being driven by three factors slamming the economy simultaneously, according to Societe Generale.There team of Asia analysts point to a combination of monetary tightening, a margin squeeze, and supply-chain disruptions due to the Japanese earthquake as the main drivers.
From Societe Generale:
The monetary policy tightening so far has started to bite on the private sector, especially small- and medium-sized enterprises. Commodity price inflation and wage growth has driven manufacturing costs up by 20~30%, while the government is trying to block pass-through to consumer prices. This margin squeeze has led factories to scale back input purchases since March, which is evident in PMI surveys. Current power shortages are actually one the examples of margin squeezes. Last, the impact of Japan’s earthquake has reached China’s auto sector, as sector production contracted 1.8% yoy in April.
But this slowdown doesn’t mean that China is about to go through the oft-mentioned “hard landing” scenario. There’s plenty still going right for growth, with consumption and investment still rising, and loans still be doled out freely.
The big question, according to Societe Generale’s team of analysts, is how much the Chinese economy needs to slow, for the country’s leadership to halt its tightening cycle.
Gary Shilling said in February that a Chinese hard landing would require a fall back to 6% GDP growth. Right now, however, the current industrial production data suggests we’re going to see 9.1-9.4% GDP growth in 2011, according to Societe Generale. So we’re not even close to that hard landing scenario, yet.
Note Chinese GDP’s typical path, along with industrial production.
[credit provider=”Societe Generale”]