China’s supply chain may face new challenges

Supply chain managers are being cautioned to expect a downturn in China’s consumer demand.

As China strides into the Year of the Dragon, its economy is in the midst of an aggressive slowdown, warned IHS Global Insight economists. Although year-on-year growth came in above expectations at 8.9 percent, the annualized quarter-on-quarter rate sank to 8.2 percent, significantly below Q3’s 9.5 percent.

Other indicators point to a faster slowing economy, with real estate investment growth decelerating rapidly in the final month of the year.  In this light, the property market correction is providing the greatest downside momentum, with still-tight credit conditions choking activity in the broader economy and the precarious Eurozone providing plenty of drag.

“The worst is still to come, with GDP growth likely to sink over a percentage point lower this quarter,” said chief China economist, Todd Lee.

IHS Global Insight projects GDP growth of 7.5-8 percent for 2012, although the risk remains solidly on the downside.

“That said, the purchasing managers’ indices suggest that demand withdrawal in the current downturn is nowhere near as severe as in 2008-2009,” noted Lee. “To some extent, improvement in the US economy has cushioned the demand correction in Europe.
Given the Eurozone crisis has, thus far, been a slow-bleeding process – unlike the sudden collapse of the US financial crisis – China’s hard landing risks are not imminent, at least from the external sector.”

The medium-term risks cannot be overlooked. Indeed, the export sector outlook appears bleak, whilst the improvement in the US economy is tepid and we do not expect any drastic turnaround. Even if the Eurozone avoids a near-term blowout, its longer-term growth will likely remain weak given the fundamental structural problems of the monetary union remain unresolved.

Lee said that the key question for China’s export sector is whether it can reorient itself and create a supply-side boost to cushion this external demand weakness.

“Furthermore, the goal of spurring household consumption demand remains elusive, given the structural nature of high household saving,” he said.

IHS economists said that in this respect, there is still little sign of progress towards the official goal of rebalancing. Even as external imbalances appear to be resolving themselves, internally the economy is even more skewed towards investment.