Friday, March 14, 2014

Chinese Premier Warns of "Serious Challenges" Ahead

From the Telegraph:
Chinese industrial production rose at its slowest pace in five years in early 2014 and retail sales also weakened as Premier Li Keqiang warned of “serious challenges” ahead. 
Industrial output, which measures production at factories, workshops and mines, rose 8.6pc in January and February year-on-year, the National Bureau of Statistics said.
The result was the lowest since the 7.3pc recorded in April 2009.
Retail sales, a key indicator of consumer spending, rose 11.8pc in the same period compared with the previous year, the lowest since an 11.6pc increase in February 2011.
The figures raise concerns that the slowdown in the world’s second-largest economy is worse than previously thought.
Of course, this is still much higher growth than most "mature" (i.e., stagnant) economies, including here in the United States. However, here are a couple potential weaknesses. First, even if its economy continues to expand, China must still deal with its populace's expectations--and, it does not appear that growth is going to meet such expectations. It's a tricky situation because much of personal savings in China is tied up in real estate. If a lot of people decide to start pulling money out of the real estate market to meet their personal expectations, it could send prices down and pop the real estate bubble. Second, there may be continued concerns with unwinding China's shadow banking system. I would note that a lot of Chinese loans were obtained using copper as collateral. In fact, an estimated 60-80% of China's copper imports have been used as loan collateral. But the price of copper has been dropping rapidly, and is expected to continue to drop. Some (many?) of those loans may currently, or soon, be under-collateralized. If some of those enterprises fail, the banks are going to lose money on their loans--plus, start selling copper, which will further depress the price.

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