Nov. 1, 2010 -
PRLog -- We believe that cracks are beginning to appear in the Chinese economy, which should grow in magnitude over the coming months. Manufacturing surveys suggest economic activity slowing sharply, while fears of falling property prices are leading to rising stress in the banking system. Despite these negative developments, and amid an increasingly uncertain outlook for external demand, the People's Bank of China has allowed the yuan to appreciate mildly against the US dollar. With domestic economic activity slowing and rising wage pressures indicating brewing inflationary expectations, the stage is set for a slowdown of both domestic and external demand. R ecent strikes at Japanese carmaker part suppliers suggest that the days of cheap labour in China could be nearing an end. How the government reacts to worker demands for higher wages and the right to form trade unions could signal the extent to which the Communist Party of China will allow meaningful restructuring of the economy. On the external front, the decision to announce the end of the CNY / US $ peg is likely as much of a political decision as it is an economic one. Beijing has come under fierce criticism over its currency stance, particularly from the US congress, and it seems likely that the central bank's decision was driven by a desire to prevent US Treasury Secretary Timothy Geithner labelling China a currency manipulator. Bilateral tensions are likely to ease following the decision. We expect China's manufacturing sector to record a contraction over the next few months as measured by the HS BC purchasing managers' index (PMI) as the combined impact of a fading domestic investment boom and a decline in exports hits home. Prior to the release of the May HSBC PMI figure, we argued that the peak in the manufacturing recovery was behind us and warned that an outright recession in China should not be overlooked. Following this report, May's PMI fell from 55.4 to 52.7, and the 50.4 print in June shows China's manufacturing sector (which represents just under half of the entire economy) is barely expanding. This signals that China's major growth driver is waning fast and we expect the index to slip below the crucial 50 level (which denotes the line between expansion and contraction)
over the coming months. T he recent surge in labour disputes, which have seen minimum wage rates rise in a number of provinces, pose a threat to China's standing as a cheap labour hub. In our proprietary business environment ratings, China scores 51.3 out of 100, ranking it in 59th position globally. We are particularly concerned by the area of market orientation, which scores a below-par 45.2 out of 100, ranking it a lowly 84th out of the 168 countries covered.
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