Unlike in the United States where a financial crisis spawned a credit freeze and then an entire economic slowdown, the situation in China is quite different.
China has not experienced a financial crisis nor a financial system meltdown. Rather China's current economic problems are focused on a rapid and dramatic slowdown in manufacturing output. Manufacturing output has contracted for five months in a row and is expected to continue to contract in the first half of 2009.
Simply put the majority of the customers for China's manufacturing output were in the US, Europe and Japan. Now that these customers are not purchasing goods at the same rate output is falling. No customers, no production...just inventory.
With factories slowing down or closing suppliers of raw materials are also reducing output as demand shrinks and prices fall.
Back when recessions were more easily forecast analysts would generally be able to predict when a recovery wold begin. The problem with today's predicament is that the entire world system has slowed to a snail's pace.
The world economy needs a catalyst to spark demand and get the system rolling again.
It seems that China's major $600 billion stimulus package could prove to be a possible stimulus however it may be misdirected because the factories that are closing were primarily shipping product to international customers. A Chinese domestic stimulus package that does not stimulate consumer purchasing may not be the answer.
On the other side of the Pacific the new President (Obama) is pushing for an even larger stimulus package which may come in at $1 Trillion dollars. This package will certainly be targeted at consumers in order to encourage them to start purchasing again. It is unclear if it will be successful and how long it will take to reach the heart of the problem.
Regardless, the first six months of 2009 look like a very difficult time in China. The stimulus packages will not take root that quickly, production will continue to slow, unemployment will rise. Until customers start showing up again it will remain difficult.
On the good news front....the Chinese government has implemented significant reforms in the Real Estate sector which should stimulate the purchase of new apartments or second/third apartments. This could provide an economic stimulus to industry sectors associated with the Real Estate market.
For now Chinese consumers are holding on to their cash waiting for the storm to pass. When it does pass I firmly believe there will be a tidal wave of new investment coming from pent up demand for higher returns.
The next bubble ?....
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