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China’s Economy Is Slowing

Written by Gary North on February 2, 2015

Around the world, economies are slowing. This includes China.

Keynesians are terrified of price deflation. The idea that consumers should benefit from falling prices is anathema to them. They are horrified at what is happening. They want central banks to inflate even more.

The risk of global deflation looms large for 2015 as surveys of China’s mammoth manufacturing sector showed excess supply and insufficient demand in January drove down prices and production.

While the pulse of activity was livelier in Japan, India and South Korea, they shared a common condition of slowing inflation.

“The slide in global oil prices and inflation has turned out to be even bigger than anticipated,” said David Hensley, an economist at JP Morgan, and central banks from Europe to Canada to India have responded by easing policy. “What is now in the pipeline will help extend the near-term impulse from energy to economic growth into the second half of the year.”
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A fillip was clearly necessary in China where a pair of surveys showed manufacturing struggling at the start of the year. The HSBC/Markit Purchasing Managers’ Index (PMI) inched a up a fraction to 49.7 in January, but stayed under the 50.0 level that separates growth from contraction. More worryingly, the official PMI – which is biased towards large Chinese factories – unexpectedly showed that activity fell for the first time in nearly 30 months years.

The reading of 49.8 in January was down from 50.1 in December and missed forecasts of 50.2. The report showed input costs sliding at their fastest rate since March 2009, with lower prices for oil and steel playing major roles. Ordinarily, cheaper energy prices would be good for China, one of the world’s most intensive energy consumers, but most economists believe the phenomenon is a net negative for Chinese firms because of its impact on ultimate demand.

The PMIs only fuelled bets that more monetary easing and a weaker yuan was in store for the world’s second-largest economy. “China still needs decent growth to add 100m new jobs this year, plus China is entering a rapid disinflation process,” ANZ economists said in a note to clients. “We [think] the People’s Bank of China will cut the reserve requirement ratio by 50 basis points and cut the deposit rate by 25 basis points in the first quarter.”

The slowdown has also spread into China’s burgeoning services sector, which was the lone bright spot in the economy last year. Service activity expanded at its lowest level in a year.

Continue Reading on www.theguardian.com

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