Is Another Lehman Episode Lurking In China?

9 April, 2014

Those who have been in touch with the latest happenings in China, would have come across the news of a mini-stimulus to give a slight nudge to the economy, which is certainly slowing down. While the results of the stimulus will be known only after a few months, the latest figures do show that all is not well in the Dragon country. The manufacturing indices show that it is contracting quite significantly. There also was a disturbing trend of corporate default, for the first time in the history of China. This certainly led many financial analysts and economists to believe whether another Lehman type of event for waiting to happen in this country. Although, such fears are far-fetched, still the warning signals are there for all to see.

Chinese Export Market Can Insulate

However, according to experts, the chances of another Lehman like incident looming over China are very low because the country is a big export giant. Though the Chinese domestic consumption is passing through a rough patch, it is the exports which are keeping the country well and truly afloat.

The Growth Number Estimates

There is no doubt that the corporate default certainly has raised fears of the economic bubble bursting. However, when one looks at the growth story of this country, it is of concern but not exactly alarming or disturbing. The growth in the last quarter was around 7.7 percent which is lower than 7.8 that were reported in the earlier quarter. Hence, the fiscal stimulus package that was announced was to encourage sentiments.

Restructuring is taking place in China

Though the manufacturing sector is going through a very bad phase and is the worst since July last year, there are still reasons to believe that the period of reconstruction and restructuring has well and truly started. The PMI or purchasing managers index is around 48.0 in March this compared to 50.2, a few months ago. While this is a matter of concern, the recent credit stimulus that has been announced will certainly help many to understand that it will push China out of this temporary problem.

The biggest problem with many Chinese manufacturing sectors is that they have build capacities, far in excess of demand. Further, the reducing rates are also creating problems and when these factors are taken together it certainly is impacting the growth in this segment. However, there are reasons to believe that things will mend over the next few months. It would be right to write more about the China growth story, only after the effects of the mini stimulus package are visible.

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