"China may be heading for a severe economic slowdown"

The dreary forecast comes from Eric Fishwick, chief economist at CLSA, an Asia-focused private equity firm. His reports in particular contends that the Chinese cannot possibly meet its growth projections for next year.

One does not cross the officialdom in China casually. That suggests that either 1) CLSA is quite confident they won’t be making any investments in China for a while, and can afford to annoy the powers that be by building credibility with their non-Chinese audience; 2) it is an open secret how bad things are likely to get so that the CLSA call is no revelation if you are plugged in; and/or 3) CSLA is a sufficiently small player that they can risk making a gutsy call (they aren’t high profile enough to merit lasting anger).

From the Time Online in “Respected analyst Eric Fishwick says that China may be heading for a severe economic slowdown“:

China must be radically reassessed by investors and could be lurching towards a more dramatic economic slowdown than Beijing authorities will admit,…

Even with aggressive government measures, growth in 2009 could plunge to 5.5 per cent, [Eric Fishwick] said.

The super-bearish forecast depends on certain weak signals that may emerge in the fourth quarter of 2008, but comes amid reports from the Chinese electricity sector that suggest the country’s mighty manufacturing engine-room is already sputtering badly.

More than 70 per cent of the electricity generated in China is consumed by industry and according to reports, monthly national power output in October fell for the first time in a decade.

Traders in Singapore said it could be a slump that would have a huge negative impact on global commodity demand: ferrous and nonferrous metal-processing industries are among the heaviest consumers of electricity in China and it is their slowdown that is reflected in the drop in power usage….

IMr Fishwick dismissed the idea that the authorities in Beijing would be able to manipulate the economy as effectively as other analysts believe…..

In the report, Mr Fishwick acknowledges that the 5.5 per cent growth forecast theory will be resisted: the market has come to believe that Beijing will simply “not allow” growth to slow below 7 per cent.

But he argues that while Beijing has greater influence over China’s economy than most other Asian governments have over theirs, the breakneck expansion of the private sector – now two thirds of the economy – means that large parts of China’s growth machinery are beyond Beijing’s direct control and subject to the same rules and laws as other market economies. “Investors need to analyse China as ‘Just Another Capitalist Country’ and question whether government policy will actually work,” he said.

“China is revealed as extremely cyclical with the volatile expenditure components much larger compared with the stable ones. Our 5.5 per cent GDP forecast has already factored in a broad and aggressive government stimulus.”

Capitalist economies, he added, are hard to control and respond slowly and unpredictably to government policies.

Although China does have more mechanisms to influence economic activity than elsewhere in Asia, because GDP composition is biased towards exports and investment, external conditions will hold sway.

Also limiting Beijing’s influence on economic growth is the relatively low contribution to GDP of consumer spending and government investment – 37 per cent and 2.3 per cent respectively.

In that light, said the CLSA report, both measures to boost spending and any proposed fiscal policy gambits will be of limited overall effect.

Even when China ramped up spending in 1998 in response to the Asian Crisis, it did not manage to maintain growth levels above 8 per cent..

Print Friendly, PDF & Email


  1. Anonymous

    Still, no one is certain what really goes on in Red China.

    I wonder if the US bartered Taiwan away to China in exchange for some moral support.

  2. Anonymous

    “That suggests that either 1) CLSA is quite confident they won’t be making any investments in China for a while, and can afford to annoy the powers that be by building credibility with their non-Chinese audience; 2) it is an open secret how bad things are likely to get so that the CLSA call is no revelation if you are plugged in; and/or 3) CSLA is a sufficiently small player that they can risk making a gutsy call (they aren’t high profile enough to merit lasting anger).”

    or 4) CLSA has no idea what they are talking about. But like the press coverage never the less.

    To the top guy, Taiwan was never America’s to give.

  3. Yves Smith

    Anon of 12:42 AM,

    Xie was not the only Morgan Stanley analyst writing about China, and perhaps more important, he is no longer at Morgan Stanley, which may prove the point.

  4. k

    “Xie was not the only Morgan Stanley analyst writing about China, and perhaps more important, he is no longer at Morgan Stanley, which may prove the point.”


    Yves, again, you step into a territory you are not familiar with.

    Andy Xie was sacked back in Sep. 2005 when he called Singapore “a casino and money laundry center set up for SE Asia dirty money.” That and the fact he was fired publicly tells you more about Morgan Stanley and Singapore government than Chinese government.

    Since then, Andy Xie has been an “independent economist.” (Don’t know what that means.) But in retirement he is not. His monthly column is featured prominantly in Caijing, Chinese version of Fortune, and all other kinds of newspaper. And he has been readily available for TV interview throughout China. In one word, Andy Xie is hot, hot, hot. (Though admittedly many retail investors don’t like his calling of stock market top when Chinese A-share was at 6000 a year ago.)

    Also, CLSA is a Hongkong based brokerage house. Don’t know whether it has a PE arm or not.

  5. Yves Smith

    I am aware of the Singapore incident, but am also of the belief that one controversial call, particularly when it offends the government of a country that frankly is not a big source of business is not sufficient in and of itself to get one fired (government business may be prestigious, but it is not very lucrative, except for privatizations. And Temasek should not be part of the equation, it is supposed to operate autonomously). I have worked for banks and investment banks long enough to have an idea of what usually constitutes a hanging offense. Xie’s remark by itself simply does not cut it.

    Saying something merely offensive generally results in some major retribution and groveling. Now perhaps Xie was not willing to retract, I don’t know that for a fact, but the normal ritual is a visit of bigwigs to grovel, a retraction and apology by the offender, and often some private assurance that the offender suffered in some way (as in his bonus was docked or his responsibilities curtailed). The firing suggests to me that Xie had pissed off too many people for too long (and the Chinese would be high on the list) and the Singapore remark was the last straw. In fact, it says they were LOOKING for an excuse to fire him, but wanted something clear cut.

    The Times said CLSA has a PE operation.

  6. Anonymous

    Back around the end of August, some guy was on CNBC saying much the same thing, slowing growth to 4-6% range, RMB devaluation, etc.

    Nothing new in this

  7. patrick neid

    Never having lived in a country where I walk out the door and the econ is growing at 8-12% for 15 years I can’t fathom the numbers.

    While growth at 6% is a drop of 50%from a previous 12% condition does it have the same feel as our dropping from 3% to 1.5%, or is it much worse even though the percentages appear to be the same?

    I bring this up merely to say that the average American doesn’t feel the drop from 3 to 1.5, most know about it through the MSM. But 12% to 6% that seems feelable!

  8. Anonymous

    There is something unreal about 5.5% growth being defined as a “severe economic slowdown”. Yes, I’ve heard the argument that China needs a very high minimum rate of growth just to create enough jobs for the teeming millions. But still.

    And although there seems to be an undercurrent of schadenfreude at the prospect of an economic and military rival taking a fall, no one seems to be mentioning the utterly catastrophic consequences for the US if a slowed-down China no longer has a huge cash flow of dollars to be recycled into Treasuries. The consequences of foreign central banks withdrawing from Agencies are already being felt in the form of bafflingly high spreads. What happens when they back off from buying Treasuries too, just as the extraordinary funding requirements of the US soar even higher? The war effort, bailouts, alphabet soup Fed facilities, and the plain old longstanding budget deficit will all add up to an enormous funding crisis that isn’t even on most people’s radar screens.

  9. Matt Dubuque

    The reason they published this is because it is an open secret and everyone who is plugged in knows what is going on. This is not really news. It’s been out there for months.

    It’s just that the American media is completely clueless. Note that even this story was from Britain.

    But still the Americans do not get it.

    Feminism taught us that the personal is the political.

    Therefore, consider the following:

    Your extended family has a major financial crisis. Would you rather experience that shock with 100 million dollars in the bank or being in debt 100 million dollars facing imminent bankruptcy?

    Only a fool would argue they were equivalent.

    Similarly, if you were a nation undergoing an enormous financial shock, would you rather have 2 TRILLION in the bank (i.e. China), or be 2 TRILLION in the hole (i.e. the USA)?

    Only a fool would argue they are equivalent.

    Matt Dubuque

  10. Mean Mister Mustard

    Interesting article, but I think mention of China’s over-investment was largely missing. Everyone who says China isn’t about exports elides over the fact that much of the domestic growth is in construction and that a strangely large percentage of those buildings are empty.

  11. mft

    There have been several indications recently that China’s steel industry is collapsing. This could be because of falling exports (unlikely), an investment stop (likely), or burst real estate bubble (also likely).

    For years investment (about 40% of GDP) has has been the real motor of Chinese economic growth, driven by the opportunities presented by exports and domestic consumption. It has been an investment-led economy far more than an export-led economy.

    What happens now if the collapse of the steel industry spreads to other heavy industry sectors? Is the rest of the world going to be flooded by Chinese goods at dumping prices? Deflation, anybody?

  12. Anonymous

    Some say PRC, Asia can
    expand local/domestic demand
    . Some say they are still
    dependent on exports.

  13. Anonymous

    Yves: fyi – a couple of weeks ago I was in China. When I arrived your blog could be accessed, but your article “Renminbi to Fall Next Year?” http://www.nakedcapitalism.com/2008/10/renminbi-to-fall-next-year.html caused it to be blocked by the censors. Looking at the official sources such as China Daily (www.chinadaily.com.cn), Chinese officials are clearly trying to steer the economy towards a soft landing…

    FIrst we all heard that Chinese demand would keep commodity prices rising and rising (irrespective of what would happen in the West), now we hear that domestic Chinese demand will still keep their economy growing by over 6%. Not being an economist myself, can some please explain how they would be able to do this?

  14. madmilker

    People in America need to realize jus what got America in this shape…”cheap” yes so-call cheap items from a foreign land and now the largest company in America wants to make everything “green” but at the same time they put 95% made in China in their stores in China and support Chinese export…don’t take my word…its on their China web page quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote! Now! if there be 182 country’s making items for the world to buy and they have only 5% of the pie in China…duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there…. but with the “yuan” going up in value and the US dollar going down…all the foreign items that the American consumer buys thinking it is cheap has went up in price. People…its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the “we the people” have to turn to the “second” largest employer in America(Uncle Sam) to sell “we the people” debt in order to get all them dollars back! 50 years ago a foreigner would had given their left nut for a US dollar or a Hershey’s chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think “MADE IN AMERICA.”

  15. RBG

    CLSA has a small (c.US$1B) private equity operation, but its main activities (revenue/profit sources) are brokerage. It has big research operation for its brokerage.

  16. mft

    BEIJING/SAO PAULO (Reuters) – China approved a massive stimulus plan on Sunday worth nearly $600 billion through 2010 to boost domestic demand as part of a global push for measures to soften an expected recession in many countries.

    Now that IS a stimulus plan!

Comments are closed.