Bearish on China

The giant economy is slowing, with worrying consequences

Those bullish on the Chinese economy will argue that periodic reports of a coming crash over the past several years have always been proven wrong. They have a point, but the bad news is coming with ever greater regularity. Few are predicting a crash, but the consensus view gets more pessimistic with every month. Wednesday's news was that HSBC's purchasing managers' index (PMI) for April signalled a contraction for the fourth month in succession. The PMI was 48.3, below the level of 50, anything above which only suggests expansion. The report comes on the heels of surprisingly poor export data that showed exports slumping by six per cent in February. One reason for the exports fall is statistical - the effect of a different date for the Lunar New Year, which is China's equivalent of Christmas and Diwali rolled into one. The industrious country slows to a near halt then. Still, the six per cent drop in exports in February represents the worst performance for this famously export-led economy since the financial crisis. As it happens, China's target of 7.5 per cent GDP growth in 2014 was articulated at the party congress meetings in March just a week before the export numbers were revealed. That goal looks difficult to achieve.

The bad news comes from just about everywhere in the Chinese economy at the moment - lending is being curtailed as bad debts mount. As its construction industry slows, heavy machinery makers like the giant Zoomlion are showing the strain. An analysis in the Wall Street Journal earlier this month showed that receivables had jumped to 124 per cent of revenues at the end of 2013. What's more, Zoomlion sells a lot of its machinery by leaving the final burden of collecting money with the banks. The company said it had had to spend 673 million renminbi to buy back this equipment from the banks, likely because the final customer was unable to service the loan. The effect of all this bad news will be felt overseas. Commodity exporters and a host of component manufacturers will suffer as China's reliably voracious demand becomes less reliable and its exports markets slow.

But so too do emerging markets, including India, that have become dependent on China for investment funds. As the Financial Times noted recently, "China Development Bank and to a lesser extent China Export Import Bank were the best friends the emerging markets ever had. They lent money to companies and governments in places where the availability of capital was low, the tenure short and the cost high." China Development Bank's international lending is estimated by one adviser to have dropped by 50 per cent. That is not good news for countries in Africa, Latin America and Asia that had come to rely on the Chinese as generous and sometimes seemingly indiscriminate lenders. It remains to be seen whether any other country shows the inclination to lend to the developing world as China did in the go-go years. The consequences of China's slowdown may prove as complicated to manage as its rapid ascendance.