Investors could be in for a shock in 2009, says Albert Edwards of Société Générale. The Chinese economy appears to be “imploding”. Electric power output, which normally moves up and down with GDP growth, has been declining for the past three months, while the Chinese OECD leading indicator, which GDP growth has followed closely over the past decade, has plummeted, suggesting growth is set to collapse.
Parts of Asia that have relied on rapid Chinese growth are also suffering. Japanese exports to China were down 25% year-on-year compared with growth of 16% as recently as July. Taiwanese exports to the Middle Kingdom are down by an annual 40%. What’s more, Chinese imports were down by an annual 21% in December, and the three-month moving average of US export growth to China has fallen below the zero line, pointing to slack domestic Chinese demand.
With the export-dependent economy slowing fast, the government faces mounting social upheaval and protests could escalate to the point where the regime itself is under threat. To pre-empt this, the government could opt for a major devaluation of the yuan to resuscitate exports, says Larry Elliot in The Guardian. “Beijing has form in this area” – in 1993 it devalued by 33%. Such a move would “prompt swift retaliation” from America, raising the prospect of a 1930s-style competitive devaluation and global trade war. It’s a last resort for Beijing, but given the choice between “political survival and upsetting the new president”, it will opt for the latter.