The great Chinese manufacturing powerhouse is slowing, according to two leading indicators used internationally to assess the Chinese economy. The trouble began late in 2013, when banking giant HSBC released its annual Purchasing Manufacturing Index. It showed a five-point decline to 49 in Chinese manufacturing, indicating that a slow expansion had cratered into contraction. The second blow was a lower-than-expected government PMI of 51.
Two main factors are driving this slowing of the Chinese economy.The first factor taking the wind out of the Chinese manufacturing sector's sails is the growing global awareness that China's government has massively overinvested in the country's industrial base. According to University of Utah professor of Economics Minqi Li, China's state-sponsored infrastructure development budget has exceeded 50 percent of the nation's entire GDP. At that point, global investors can be forgiven for worrying about an eventual decline in available capital as the Chinese government begins cutting spending on industrial infrastructure and either applies those resources elsewhere in the nation's economy or works to reduce the country's sizable debt load.
The general scarcity of liquid capital is a related problem that's made much worse by the gradual drawdown of state investment. China's banks are sitting on top of large amounts of debt and lack the necessary cash to answer collateral calls if international markets ever stage a run on Chinese currency. At present, these banks are obligated—as are banks all over the world—to essentially stockpile the US Dollar as a hedge against both speculation in currencies and fluctuations in the price of commodities, especially oil.
This leaves borrowers in China high and dry when they come asking for credit. Chinese banks mostly have the money to secure these loans to major players in Chinese manufacturing, but they don't dare lend it out, lest they find themselves unable to meet their reserve capital requirements in the event of a devaluation. In other words, there's money in Chinese banks that could fuel further growth in manufacturing, but it can't be loaned out for fear of a general weakening of the banks' financial position.
The Chinese government, perhaps sobered by its own grim numbers and seeking to ease the shock of transition to a more service-oriented economy, has taken measures to loosen the flow of capital and hopefully stimulate the manufacturing economy. One step on that road is the reduction of reserve-capital requirements, which allows banks to lend more money than they technically have on hand. Another gesture by the government is to print more of the Chinese currency, or Renmimbi, in an effort to stimulate spending.
China has been a manufacturing dynamo for decades since the adoption of market reforms in the 1980s. For the first time since 1990, however, the Chinese manufacturing sector is showing signs of a serious contraction. State overinvestment has led to spiraling debt that has, in turn, frozen lending. Efforts to loosen capital and get Chinese manufacturing back on track have begun, but there's no guarantee that China's flagging exports will pick up as a result.
(Photo courtesy of KEKO64 / freedigitalphotos.net)
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