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While Europe's leaders were wrestling with the problem of who will bail out whom last week, the world's other two major trading blocs, the US and China, were gearing up for a potentially damaging trade war.
As China slapped punitive import taxes on gas-guzzling American cars, and stepped up its rhetoric against the US, complaining about what it said were US subsidies, some Beijing-watchers read it as a sign that the government is so alarmed about a looming economic slowdown that it is casting around for someone to blame.
The tariffs, ranging from 2% to 21.5%, will be levied on imports of SUVs and cars with engines of 2.5 litres or more, hitting the US car giants.
It's not hard to see why China is lashing out. Evidence is mounting that just a few months after Beijing was fretting about its economy overheating and taking action to tame rampant food prices, the most pressing concern now is a so-called hard landing.
Foreign investment in China was almost 10% down in November on a year earlier – the first such decline since 2009. HSBC's purchasing managers index, which tests the strength of the manufacturing sector, is pointing to a contraction in the fourth quarter. And Beijing was forced to spend some of its vast foreign exchange reserves in October buying up yuan to prevent the currency falling too far.
Alarming tales are emerging of social unrest, too. People in Wukan, in Guangdong province, have been protesting about collusion between developers and local government.
A year ago, all the talk was of China overheating as cheap US capital poured in. Beijing unleashed several measures, including raising reserve requirements for its banks and intervening to limit price rises for agricultural products, to prevent a credit boom from running out of control. But it failed to anticipate the coming eurozone slump.
"What's difficult to disentangle is how much of the slowdown in emerging markets is because China tightened policy," says Karen Ward, senior global economist at HSBC. "If it had known what was going to happen in the developed world, it might not have been so tough."
Commerce ministry spokesman Shen Danyang warned last week that "the overall trade environment next year will be complicated, partly due to the economic uncertainties in [Europe], and... the export situation in the first quarter will be very severe". Another danger signal is that the cost of shipping goods from China to Europe has dropped by an extraordinary 39% since August as demand has fallen away, according to Clarkson Securities.
Graham Turner of GFC Economics, who has studied Japan's "lost decade" of stagnation and recession, sees parallels between today's China and Tokyo's efforts to engineer a soft landing in 1990 by bringing exploding property prices under control. "It absolutely is where Japan went wrong: it tried to deflate the property bubble and it just went too far."
Michael Derks, chief strategist at foreign exchange broker FxPro, points out that credit has expanded rapidly in recent years, with the ratio of loans to GDP doubling since 2006, as Beijing encouraged borrowing to maintain demand in the face of the global slowdown in 2008 and 2009.
Chinese property prices have been falling sharply in recent weeks and there have been reports of "kerbside lenders" in the black market going bust, and hard-up business owners fleeing town to escape bailiffs.
Turner says these informal lenders in the so-called shadow banking system can be a crucial source of credit, and if the sector is collapsing, the economy could shudder to a halt. The People's Bank of China has already signalled it is switching from reining in the economy to boosting growth; he says it will have to act fast.
But not everyone is concerned about a "hard landing". Ward says China still desperately needs more infrastructure investment: "Forty per cent of people still work in fields: how can you think there's overcapacity?" She also says China has $3tn of foreign currency reserves to insulate itself against the west's travails. It could also allow the yuan to depreciate against the dollar.
As the frenzy of the euro crisis wanes, many analysts believe the eyes of the world will turn east in the new year – but it's impossible to predict what will happen next. As Turner puts it: "People can claim that it's going to go one way or another but, in reality, nobody knows."
Comments
18 December 2011 2:35AM
There is a bigger problem on hand with the Chinese economy, its inability to tackle STATE sanctioned corruption made it almost impossible to deliver any effective economic policies to respond to any crisis.
The Problem with the Chinese economy is that level of STATE sponsorship that drove cost down, this range from tax cuts and kick backs for the manufacturers who have the outsourcing contracts, to relaxing the labour laws till its almost slavery.
This is the real face of the Chinese economy, workers are the one who bears the pain for producing the worlds goods and consumers electronics, as for the Politico ... They dont care about anything other then filling their own pockets!
The west and the rest of the world should cease to outsource their manufacturing to China, this is the cause of all the problems in the world!!
18 December 2011 3:10AM
Everyone in the world should slap a hefty tax on American gas guzzlers! The writer of this story acts like this is a punitive tax when actually, given the global pollution crisis, the melting arctic ice cap, all the childhood health problems linked to smog, the disappearing resource base, the contamination of water and soil caused by spilled oil, it's the only sensible thing to do. China should raise the tariff to 1000 percent!
18 December 2011 6:08AM
I agree with 2flight, slapping taxes on gas guzzlers is not necessary bad policy and not evidence of backlash or imminent hard landing. I think the writer tries too hard to bring unrelated factors to make a story and headline which might appeal to readers.
Too many quotes from different sources with little analysis. Would not be surprised if this writer has never been to China, does not know any Chinese people and has just read a few articles to get involved in this feedback loop.
There is a lot of Beijing bashing from US politicans as a run up to the elections. Could these tarrifs be a signal to the US that Beijing will respond to any backlash from the US? Seems more plausable then the arguement proposed in this article.
Whilst few disagree that China will face a slow down and that there are issues in the banking system and shadow banking system, China is still growing at above 9%, has progressively diversified trade with Emerging markets, hence are not as reliant on Europe and US as before the financial crisis in 2008. The Chinese government has significant foreign currency reserves as rightly mentioned and they own and control the state owned enterprises which accounts for 2/3rds of the China economy. These not including normal monetary and fical policies available add up to some significant policy tools that can be used in the event of a slowdown.
18 December 2011 7:04AM
Hello from Yuncheng, Shanxi Province.
There's a giant hill of coal outside my apartment building that will be burnt for heat this winter. Same with every other apartment building here. There is a permanent white cloud across the land, and cars are much less common than motorbikes in this area of China. But do babble about big bad American cars destroying the Chinese environment.
"Gas-guzzling" is an empty word that the writer added, and it grabs more attention than the reality of China's environment problem. These cars are only bought by the extremely wealthy in China, but everyone burns coal for heat in the winter with few filters or safeguards. Congratulations on eating a red herring.
18 December 2011 9:50AM
I would suggest that over a third of total exports from china go to the US & Europe , that the trade policies they practise plus the unofficial state influence they exert is to maintain the status quo and penalises open & free trade ,
some of the emerging markets they support are yet again linked to massive trade surpluses to the us & europe
the idea that china is trying to promote a world wide environmental policy is laughable
if the usa were to adapt the same policies with china i understand 1/5 of all exports go to the usa we would see a real turn around in the advancement of chinas economy
on a seperate note if you lived in china & were chinise you would not be in a position to complain about the state of environmental isues in china
18 December 2011 10:17AM
The parallels to Japan on the late 80's are startling. China is heading for a hard landing and they know it.
And the thing people are missing is the impact on Australia. They have weathered the storm reasonably well but that is due to having an economy based on raw materials and housing. Once China starts to choke, then so will Australia. And when that happens their housing market will pop and they'll come back to earth with a bang as well.
18 December 2011 10:48AM
So why exactly are we suicidally following the tenants of absolute free trade? We allow anyone to buy our companies, award government contacts to overseas firms, have very few remaining imports taxes, and generally play by the rules of the gobalised economy. How is that possibly anything less than monumentally stupid, when China manipulates its currency, imposes import taxes when it feels like it, and won't allow foreign ownership of its firms?
18 December 2011 10:59AM
This article is 'talking all about the froth on the eddies, whilst ignoring the direction of the main current'.
Worldwide, 'economic growth' in the form trhat it has been pursued, has been 'busyness' from putting mined resources to use. Now 'the global mine is in decline'.
It is still putting forth, but not so much, nor as cheaply, as before.
Different 'customers' are affected slightly differently, according to things like how much they are indebted, how much they have made themselves dependent on receiving fuels and ores, and so on.
I see the overall effect as being a 'peaking' of the industrialism/capitalism/consumerism in the.parts of countries that have become most industrialised.
However, there are parts of the world (such as great areas of inland China) that have not got into this cul-de-sac of industrialism/capitalism/consumerism, and those areas will show how to cope with 'the decline of the mine'.
I write from the Middle Mekong of Isaan and Laos, which is one such area. The 'Western' press denigrates us as 'rural poor', but what were 'the rural poor' would now be better described as 'the peri-urban secure'.
In fact, they may well come to be envied by residents in 'high-GDP' welfare states.
There are several ways in which 'urbanity' has come to the villages.
Adults returning from working in Greater Bangkok, and in countries such as Japan, Taiwan, Korea, Singapore, the Gulf States and Israel have 'cosmopolitanised' the villages.
Paved roads now allow for youngsters to ride their motorbikes to the highway and then go to university on the bus, and so on.
The villagers still have the robust social security system of the extended family in the village, with reciprocity and redistribution in their economic system alongside the use of markets
.
They own their own houses on their own land, with no rent or mortgage payment to find each month-----so 100% housing security.
It is usual to keep a good reserve (often enough for three years consumption) of rice in their household granaries-----so 100% food security.
They keep their savings in gold.
And, finally, they work for themselves and so have 100% job security, since no boss
ever sacked himself!
Over this century, as industrialism/capitalism/consumerism contract to being a less rampant component in 'Quality of Life', there'll be much to be emulated in their lifestyle.
There are times when I think that my neighbours are so far behind the times that they are ahead of them!
Much that I see here will be being repeated further to the East in China.
When I read Heather Stewart's articles, I get the impression that she sees all economies as being credit-based, industrialised, and addicted to rampant consumerism. when in fact there is only about one-sixth of the world's population immersed in that unsustainable quagmire.
18 December 2011 11:54AM
The rating agencies don't seem to have heard about that.
18 December 2011 12:04PM
"on a seperate note if you lived in china & were chinise you would not be in a position to complain about the state of environmental isues in china"
Yes, because outside people are white masters who know everything and view china from above. Thanks for explaining that to me.
18 December 2011 1:28PM
Great post GreatGrandDad.
----------------------
Heather Stewart seems a trite too anxious to link every little thing happening in China with China's economic and political demise. Bad journalism but it sells newspapers. Aka Heather is a hack.
A much better take on the tariffs issue is
2011 December 15
http://www.forbes.com/sites/kenrapoza/2011/12/15/china-gets-revenge-on-obama-with-tariff-on-u-s-autos/
China Gets Revenge On Obama With Tariff On U.S. Autos.
President Barack Obama hit China automobile tire makers with a trade tariff in 2009 and now Beijing has struck back with a potentially more punitive tariff, as much as a 21% tax hike on U.S. car exports bound for China, the world’s largest auto market.
Frisbie suggested that cooler heads prevail. “USCBC stresses that it is even more important to ensure trade remedy investigations are fact-based, follow internationally-accepted rules, be free of politics and not a substitute for retaliatory or protectionist actions,” he said.
18 December 2011 1:59PM
are you kidding
18 December 2011 5:31PM
Looks like the US and EU QE programme has had it's desired effect lol.
18 December 2011 6:23PM
If you suggest that all the problems aren't caused by the US then readers heads will explode...
19 December 2011 1:41PM
The University of Michigan, along with other American Universities, is still signing partenership agreements with this authoritarian regime. We are giving away technology that affects both national security and economic competitiveness. Read more at www.china-threat.com
20 December 2011 12:15PM
The Chinese are acting like the totalitarians they are!
The Chinese are flooding virtually every Free Market in the world with there cheap goods, while all the time protecting their own markets from foreign imports.
Not to mention the mass theft of foreign IP!
Its time we protected our own markets and stopped the Chinese from essentially stealing from the world!