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1 May 13 2010 @ 9:58am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy

A Little Trouble in Big China

Strike that, reverse it.

It’s a funny thing. China’s economic situation is like one of those salacious rumors you see on the cover of a glossy magazine at the grocery store; you never quite know if it’s true or not. Like the relationship of Brangelina, no-one really has a good handle on whether China is as perfect as everyone thinks. Sometimes we have to work from the facts that are available, while holding ourselves back so as to not fill in the blanks. So through proof and not the paparazzi, let’s take a look at the sleeping dragon. 

What has put China on the burrito chopping board in the first place was one of the ten simple points I outlined in last week’s post – about how Chinese oil demand will represent 10% of global oil demand this year, and how this will likely double by 2020 to 20% (and potentially surpass the US). While to truly understand this phenomenal rate of growth is a pinch unfathomable, the below chart provides a crystal clear picture of the trend for Chinese oil demand: 

 Just as celebrities inevitably face a backlash, China is receiving some negative attention from key market commentators, who are calling for a market crash in the next nine to twelve months. And this view isn’t completely without merit; cracks are appearing in the economy. This has recently manifested itself in Chinese stocks; the Shanghai SE Composite Index has now fallen over 20% from its highs made in August 2009 – statistically classifying it in a bear market. Then there are signs of slowing in data such as car sales, which are only up 34% year-on-year for April, when the previous month was up 63% (on the flipside, the number of households earning sufficient funds to buy a no-frills car, is estimated to nearly double over the next four years to 65.6 million). The manufacturing sector is also showing signs of slowing, although again it also remains expansionary. And then there is GDP, which is likely to have peaked for this year (albeit it at a nosebleed rate of 11.9% for Q1). The downside to China’s success means you essentially become a coconut shy for critics. 

As is common for fast-growing emerging market economies, inflation remains an ever-present threat. And China is well aware that an inflation rate at an 18-month high is a worry. But it is a tightrope that the Chinese authorities walk; the effect of raising interest rates or revaluing their currency is difficult to predict – it could quash growth rather than rein it in. Hence their enthusiasm to try such slowly slowly catchy monkey techniques such as incrementally raising the reserve requirements for banks (=essentially restricting bank lending), while trying not to halt expansion. It is easy to criticize China, but their reality is a case of tempering inflation while encouraging growth – like trying to open a can of soda with a hammer and a nail – it’s possible, but pretty darn hard. 

So, meanwhile, back at the chopping board, data show China to not be in bad shape, but with a clear need to remain vigilant on their economy. And like Brangelina, China needs to avoid the paparazzi and focus instead on themselves, because, afterall, we are all secretly envious of them.

1 Comment on this post:

  1. […] == "undefined"){ addthis_share = [];}Nearly two years (and 200 posts ago) we took a look at A Little Trouble in Big China, as China’s economy was showing signs of slowing. Six hundred and seventy-six days later, signs […]

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