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Chinese downturn fuels fears crisis is spreading east Chinese downturn fuels fears crisis is spreading east
(5 months later)
At Burberry's flagship Beijing store, a three-floor monument to China's insatiable appetite for luxury goods, the famous check is everywhere: in three dimensions on the black exterior walls and inside, reproduced on everything from babies' bibs to suitcases.At Burberry's flagship Beijing store, a three-floor monument to China's insatiable appetite for luxury goods, the famous check is everywhere: in three dimensions on the black exterior walls and inside, reproduced on everything from babies' bibs to suitcases.
On a cool spring day, trade is modest but steady, with no hint of the economic malaise that some investors fear is about to grip the world's second largest economy. While the markets fret about a collapse in China's huge shadow banking system, there is nothing covert about the shoppers at Sparkle Roll Plaza or the goods they are examining.On a cool spring day, trade is modest but steady, with no hint of the economic malaise that some investors fear is about to grip the world's second largest economy. While the markets fret about a collapse in China's huge shadow banking system, there is nothing covert about the shoppers at Sparkle Roll Plaza or the goods they are examining.
For the pessimists, problems that have been lurking beneath the surface glitter are starting to appear. Three months ago, the sense was that carefully calibrated policy action by Beijing would ensure strong growth with low inflation. But last week, the fears of a hard landing were back. Put simply, the concern is that China in 2013 is the US in 2007 – about to experience its very own sub-prime crisis.For the pessimists, problems that have been lurking beneath the surface glitter are starting to appear. Three months ago, the sense was that carefully calibrated policy action by Beijing would ensure strong growth with low inflation. But last week, the fears of a hard landing were back. Put simply, the concern is that China in 2013 is the US in 2007 – about to experience its very own sub-prime crisis.
Exhibit number one in the prosecution case is that the property market is running hot. The cost of real estate in Beijing is 8% up on a year ago; in Shanghai, prices are up by more than 6%. In both cities, house price inflation is accelerating.Exhibit number one in the prosecution case is that the property market is running hot. The cost of real estate in Beijing is 8% up on a year ago; in Shanghai, prices are up by more than 6%. In both cities, house price inflation is accelerating.
Exhibit number two is debt. Last week, the ratings agency Fitch downgraded China's sovereign rating amid concerns about the debt amassed by local government to fund an expansion in infrastructure spending in 2011. The new government in Beijing sees tackling the local government debt timebomb as a priority, but some officials say privately it is already too late.Exhibit number two is debt. Last week, the ratings agency Fitch downgraded China's sovereign rating amid concerns about the debt amassed by local government to fund an expansion in infrastructure spending in 2011. The new government in Beijing sees tackling the local government debt timebomb as a priority, but some officials say privately it is already too late.
Exhibit number three is that growth is both unbalanced and slowing. China's expansion, despite moves towards stronger consumer demand in the past four years, is still reliant on investment and exports. Much of the capital spending has been on inefficient enterprises that are now struggling due to rising wages and competition from other developing nations.Exhibit number three is that growth is both unbalanced and slowing. China's expansion, despite moves towards stronger consumer demand in the past four years, is still reliant on investment and exports. Much of the capital spending has been on inefficient enterprises that are now struggling due to rising wages and competition from other developing nations.
So while China's growth rate at 7.7% in the year to March was still strong, it was weaker than the 8% expected. Nor is business in the high-end shopping malls as brisk as it was.So while China's growth rate at 7.7% in the year to March was still strong, it was weaker than the 8% expected. Nor is business in the high-end shopping malls as brisk as it was.
The businesswomen barking into their mobile phones while fingering coats have helped push up retail spending by 12.2% for the year ending in the first quarter of 2013. But that was down from 15.2% three months earlier.The businesswomen barking into their mobile phones while fingering coats have helped push up retail spending by 12.2% for the year ending in the first quarter of 2013. But that was down from 15.2% three months earlier.
According to one salesman, his big sellers are scarves – wool for winter and silk for spring and summer. With prices of around 4,000 yuan (£423), these provide the most accessible means to buy into the Burberry check.According to one salesman, his big sellers are scarves – wool for winter and silk for spring and summer. With prices of around 4,000 yuan (£423), these provide the most accessible means to buy into the Burberry check.
"The iconic pieces such as trench coats and jackets are also very popular," he adds, admitting that the high-fashion, high-price Prorsum range is not flying off the shelves."The iconic pieces such as trench coats and jackets are also very popular," he adds, admitting that the high-fashion, high-price Prorsum range is not flying off the shelves.
Analyst Albert Edwards of Société Générale said a recent trip to Asia had left him concerned about the vulnerability of the Chinese growth engine, particularly in the light of the fall in the value of the Japanese currency.Analyst Albert Edwards of Société Générale said a recent trip to Asia had left him concerned about the vulnerability of the Chinese growth engine, particularly in the light of the fall in the value of the Japanese currency.
"A sliding yen comes at a time when China's balance of payments situation has deteriorated and a pronounced real exchange-rate appreciation has triggered a reversal in investment flows. To me, this closely echoes the situation in the runup to the 1997 Asian currency crisis," Edwards said."A sliding yen comes at a time when China's balance of payments situation has deteriorated and a pronounced real exchange-rate appreciation has triggered a reversal in investment flows. To me, this closely echoes the situation in the runup to the 1997 Asian currency crisis," Edwards said.
These problems should be put into perspective. China's recovery from the slump of 2008-09 has been impressive. While industrial production in Europe and the US is still below its pre-crash levels, in China it is 76% higher. Germany, France, the UK or the US can only dream of the 7.7% growth seen in China over the past year.These problems should be put into perspective. China's recovery from the slump of 2008-09 has been impressive. While industrial production in Europe and the US is still below its pre-crash levels, in China it is 76% higher. Germany, France, the UK or the US can only dream of the 7.7% growth seen in China over the past year.
Nor is it rare for emerging countries to suffer often painful boom-busts during a period of rapid expansion. The US had regular financial crises in the second half of the 19th century, during a period of industrial take-off. But after three decades of spectacular growth, China is now pivotal to the global economy. A crash, even a relatively brief one, would send the crisis of the past five years into a dangerous phase.Nor is it rare for emerging countries to suffer often painful boom-busts during a period of rapid expansion. The US had regular financial crises in the second half of the 19th century, during a period of industrial take-off. But after three decades of spectacular growth, China is now pivotal to the global economy. A crash, even a relatively brief one, would send the crisis of the past five years into a dangerous phase.
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