China slowdown and contagion

HSBC released research today indicating that wage disputes and 24% pay increases like Honda and Foxconn are rarities. “But we see this as good news because it shows that the growth recovery is filtering through to the household sector. With wage income improving substantially, growth in consumer spending is set to stay strong for the rest of the year.”

“Combined with continued investment into over 60,000 ongoing infrastructure projects, this is likely to provide a floor to any growth slowdown.”

So what about wage growth’s impact on inflation? In assessing the situation we need to recognize that not every worker in China is getting a 20%+ pay rise. And, according to HSBC, all available information indicated average wage growth of less than 14% nominal wages in manufacturing.

But China is facing a massive slowdown, and it’s not often that governments and countries at large undershoot an objective. So, despite healthy wage growth now, which may be suppressed by a slow down later the simple lay of the land is this: get ready for more murky market times.

Chinese-wages-vs-output and wages vs GDP

Stephen Bartholomeusz from Business Spectator had this to say about the impacts of any slowdown as a result of overshooting the mark:

If China were to sneeze, how contagious would it be for the Australian economy? Well, according to HSBC’s global research team, it could bring on something akin to pneumonia.

In research issued this week the HSBC strategists look at the implications for a deflation of the property bubble in China for the Australian dollar and economy, arguing that while it could happen gently, the attempt by the Chinese authorities to end the speculative cycle in property could have significant ramifications for the Australian dollar.

Their starting point is that Australia has a very robust fiscal position, a resilient financial sector and, through the resources sector, a big exposure to the growth and expansion in China. In terms of the Australian dollar, they say it trades more like an Asian rather than currency, with a close correlation to China’s industrial sector and its economic cycle.

Because of that, if there were a negative event in Asia there could be significant downward pressure on the Australian dollar – which some might argue is already occurring amid signs that China’s economy is slowing.

The analysts are concerned about the Chinese property market, which has a value equivalent to 3.7 times China’s GDP. That is, they say, nearly double that of the US ahead of the sub-prime crisis and approaching the 3.8 times GDP Japan reached in the late 1980s. They say China’s authorities are determined to break the property cycle and are likely to use quite harsh policy measures if necessary.

It’s also worth noting that copper, which is a leading indicator of manufacturing demand, hasn’t looked this unhealthy in a while.

6 month Copper spot price new low


About Ed.

Digital, Search, Social leader.
This entry was posted in China slowdown and contagion and tagged , , , , , , , . Bookmark the permalink.

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