On China: Economic Outlook is Uncertain, At Best...

Although China enjoys growth well above other large economies, the global economy is more dependent on the country than it has ever been - for demand on everything from commodities to luxury goods. Any slowdown in China could send ripple effects across the world. Below are a few reasons why I believe China’s economic outlook is uncertain, at best.

1. Slowing Growth, Rising Inflation - Recent data shows that China’s economic growth slowed to 9.5% in Q2 2011, from 9.7% in Q1 2011 and 9.8% in Q4 2010. The economic slowdown has been coupled with a rise in consumer prices - inflation reached 6.4% in June (highest level in 3 years). The government has previously stated that it is targeting circa 8% economic growth for 2011 and intends to keep inflation around 4%. To tame the rise in consumer prices, China’s central bank has raised its benchmark rates three separate times this year and increased the reserve requirement ratio 6 times (banks now have to keep a record 21.5% of their deposits in reserve). These tightening measures have resulted in financing difficulties for small/medium-sized businesses trying to get capital (these businesses represent the most significant source of employment for China).

2. China is a Housing-Led Economy - Real estate has been the foundation of China’s unprecedented growth record in the past two decades. In addition, its stability and health are crucial to a variety of other significant sectors, including: steel, construction and cement. But the overheating of the housing market could cause even bigger problems for the country’s economy. The fact remains that China is a housing-led economy. Research analysts estimate that property construction accounted for over 13% of GDP (twice the share than in the 1990’s). A downturn in this market could have drastic effects on China’s economic outlook.

3. Toxic Loan Problem - Moody’s recently warned that China’s government agency may have underestimated the volume of loans lent to local governments by Chinese banks. According to the rating agency, the Chinese agency may have missed the mark by about 3.5 trillion yuan ($540 billion). Moody’s also added that non-performing loans could reach between 8%-12% of total loans outstanding. These problem loans could end up as direct obligations to the central government in China, if local banks can’t repay them.