Tag Archive for China

Trouble in Asian Markets

For anyone who takes an interest in global economics, our eyes have been largely looking at Western economies for tales of woe, stagnation and debt for some time.  But there are signs that this situation may be starting to reverse.

From our last post highlighting the recovery in the UK and some of the European countries we know turn our eyes to Asia where this week the major share indices all took a tumble.

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The problem seems to have come from the economic data being released from the two big players in the Asian market – China and Japan.   Both reports seem to be pointing towards a slowdown in the area.  The Hang Seng fell by nearly 2% and the Nikkei index closed down around 1%.

So what was in these reports to cause such a steep fall?  Well although it was not much of a surprise given the situation Japan finds itself in, the record deficit reported was still larger than expected.  What was probably more damaging though was that it’s 2013 growth estimates were revised down to combine with this bad news.

The startling figure in the Chinese figures was the fall in it’s export levels – a huge drop of 18%.  There were very few analysts expecting a fall of this magnitude and the markets took the news very badly indeed.   The Asian sell off was swift and heavy and even took down the linked Australian share index down 1% too.  There’s an interesting piece on the Newsnight programme currently available on the BBC website – I use this to watch BBC Iplayer in Ireland and

Most of the big miners took a hit, companies like BHP and Rio Tinto supply the raw materials that fuel the growth in the Asian market particularly China.  The hits were inevitable simply because the values of the metals fell in line with the news, copper fell to it’s lowest level since early last year.  Iron ore futures and steel also both dipped sharply in response to the publication of the data.

China is beginning to feel pressure on all fronts economically, and even reported that very rare event a trade deficit of about $22 billion dollars in February, only twelve months ago the corresponding figure was another surplus, an enormous switch in fortunes.  This is a sharp warning that the economic advantages that China has built it’s growth on are beginning to wane, you can only manipulate your currency value for so long and the competitive advantage of lower labour costs don’t last forever as an economy adapts.

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Economic Dependency Causes Risks

We can see that many political events across the world are heavily influenced by economic links.  Ukraine seeks greater ties with Europe but is heavily reliant on Russian gas as an energy sources.  Russia seeks to flex it’s muscles internationally but is hampered by the fact that it’s economy is almost wholly reliant on selling raw materials like gas to European countries.  Stock markets and currencies tumble when political events cause instability in these relationships.

Australian Economics

Of course some of these links bring economic prosperity to a nation too, take the almost symbiotic link that Australia has with China.  The huge growth in China has required a huge amount of raw materials to satisfy it, as the smog clouds over Beijing testify too.  A lot of these materials come from the nearby resource rich Australia, which has even been dubbed ‘China’s mining pit’.

It’s hard to find an economy anywhere in the world that is so dependent on another, China buys 31% of Australian output.  This is usually incredibly beneficial except that it makes the Australian economy very reliant on how China fares economically.  So last week when a few weak statistics suggested that China’s growth was stalling – Australia got to share the pain.

Many investors already buy Australian stock as a means to leverage the Chinese market.  It’s much safer to invest in stocks and shares in Australian as opposed to the state controlled stock exchange in China.  Chinese restrictive practices have already started to impact it’s growth especially those on digital communication.  Many firms try to avoid setting up headquarters or offices in China due to the heavily filtered internet access.  Companies and individuals are forced to invest in a fast proxy simply to make their usual infrastructure work in that environment – for many it’s simply not worth  the effort choosing to settle nearby in places like Singapore which is not regulated as dramatically.

There is probably little that Australia can do in the short term about it’s reliance on Chinese success.  The worry that the Chinese economy is looking very fragile at the moment is a very real one however. It’s currency is overvalued, there are little sign of productivity gains or the vital structural reforms many hoped for.  Inflation is rising and there is a growing outflow of capital to investment markets abroad.  Australia has little options though to continue to trade heavily with China whilst seeking to develop other trading partners to try and reduce their exposure.

For more information on this subject see this video explanation of how to access Australian media sites.

China Moves to the Slow Lane

No economy can grow at the rate of the China forever, it’s simply unfeasible and a slowdown is an inevitable result at some point.  The growth story has been huge and some measure of rebalancing is not only inevitable it is desirable too.   China has followed the tried and tested growth template pioneered by other Asian economies, Japan, South Korea and Taiwan are just a few examples.  These countries were always described as ’tigers’ in global economic terms however China is much, much bigger than these.

The worry of course for the rest of the world is simply the scale of the Chinese economy now.  The tigers had far less of an effect on the global markets than China did and many of these economies have suffered in the downturn particularly the Japanese.  The issue in a world beset by recession is of course that all these growth stories were focused on exports.  The extensive investment in manufacturing, education and infrastructure created the funnel to supply an export driven market.

This strategy raises huge amounts of foreign currency, which is essential to purchase the raw materials to supply the manufacturing plants.  However this growth model is simply unsustainable in the current climate particularly due to heavy subsidisation required to manipulate exchange and interest rates, plus keeping wages low to minimize costs.

The problem is that the market for the goods China produces is falling, growth cannot come from outside any more whilst the recession hits it’s main markets – saturation point has been reached.  The difficulty China has is moving to a new model, it needs to be genuinely competitive not just at the expense of it’s own people.  Investment in infrastructure can help but the unused developments and white elephants strewn across China demonstrate that this is not the long term answer.

China faces many problems with being genuinely competitive in a global market. It’s difficult for entrepreneurs to prosper in such a tightly controlled and monitored society.  Just taking the internet as an example – the infrastructure available should mean the country is a world leader.  However this isn’t the case as the country is handicapped by surveillance, internet filtering and censorship.

The IT tools and infrastructure used by many  global companies simply don’t work in China.  Whilst individuals worry about the lack of online anonymity – see this for instance – secure proxy, especially in a heavily monitored network, companies have extensive difficulties in simply operating.  The numerous stories of paid hackers and state sponsored industrial espionage also make many of the biggest brands wary of setting up at least on the Chinese mainland.

The restrictions that are put in place obviously are primarily targeted at the Chinese citizens themselves.  But they too are becoming well used to bypassing these, by using technology freely available on the web.  Take for instance accessing specific media sites, this video for example illustrates a method used by people to access Netflix a popular media streaming site.

These problems will severely hamper the Chinese economy, as it seeks to modify it’s model.  The problem is that the World needs China to succeed to some extent, and in many ways Chinese domestic demand could be a great boost to Western economies too.