naked capitalism

Although the press has started paying attention to the slowdown in growth in China, the focus has mainly been on Pearl River area, which is light manufacturing, primarily textiles, low capital intensity. But as the New York Times reports, the contraction is also hitting sectors where China has made substantial capital investment.

The reason this is significant is some economists have argued that exports are only a component of China’s growth, and capital investment, also been a large driver, would buffer any downturn. But if investment has been for manufacturing, which is primarily export oriented, that too will contract. Yes, China has announced a stimulus plan, but it remains unclear how much of it was spending already in the works.

From the New York Times:

China’s economy, long the world’s fastest-growing major economy, is slowing down. Economists are forecasting that after growing nearly 12 percent last year, China’s economy could slow to 5.5 percent in the fourth quarter of this year — a stunning retreat for a country accustomed to boom times.

Last week, banking regulators began warning about the risk of bad loans accumulating, and labor officials publicly worried about the possibility that mass layoffs would lead to unrest.

“It’s the speed of the deceleration that scares people,” says Liang Hong, a Goldman Sachs economist who said she recently surveyed companies in China….

The global downturn is already reaching deep into the heart of the country’s once-rapid industrial transformation — its steel, cement and construction companies — stalling dozens of multibillion-dollar investment projects. Plunging housing prices at home combined with a virtual global investment freeze have led to steel orders softening, steel prices plummeting, and inventories and losses piling up.

Coast to interior, China’s aggressive building boom is no longer so aggressive.

In Hebei Province, in north China, Capital Steel, one of China’s biggest steel makers, is building a $10 billion steel mill complex on an island, even as its profits evaporate.

In the eastern Chinese city of Hangzhou, Vanke — a huge real estate company — is spending more than $1 billion to build what amounts to a new city, with its own schools, a hospital and thousands of town houses at a time when the company is reporting a huge drop in sales.

And in Macao, new construction is grinding to a halt on one of the world’s biggest real estate developments — a massive casino and hotel complex whose cost has been estimated at $20 billion — because of huge debt obligations. About 10,000 people could lose their jobs.

Nationally, Chinese officials say their country faces a grim situation. New economic data released over the last weeks is beginning to reveal the extent of the slowdown in China.

This year, housing sales in big cities have plunged by as much as 40 percent from a year ago. Government revenue was down in October. And last month, industrial production registered its weakest growth in seven years.

“Growth is deteriorating fast,” says Andrew Driscoll, a China resource analyst at CLSA, the investment bank. “We’re not talking about China’s growth going backwards. But when supply is geared toward 10 percent growth, and it comes down to 5 percent, you have excess supply.”…

Lead smelters, which produce material for the battery industry, and aluminum producers are shutting down production lines. And cement makers — one of the pillar industries in a nation perpetually under construction — are depressed.

“This is a bleak winter for the cement industry,” says Yang Dongsen, an analyst at Merchant Securities in Shenzhen. “There’s a nose dive in real estate construction. In south China and east China, two places where real estate boomed, many projects have suddenly stalled.”

Last month, electricity production in China dropped for the first time since early 2005, a sign that big industry, the largest consumer of power, is in retreat.