The Chinese economic slowdown and its potential impact on global supply chains

China Economic SlowdownAlmost every national economy in the world has counted on the continuing strong growth and stability of the Chinese economy, but the latest news coming out of China is not good, and it could have a significant effect on supply chains around the world if the indicated slow-down continues and perhaps even deepens.

A recent report by Elliot Wilson in the Spectator magazine highlights the goings-on in a couple of China’s large manufacturing companies, and the bottom line is typical of what is happening to manufacturers across the board in China. They are operating at significantly less than full capacity and have been for a number of months now.

Missing workforce send out ripples of discomfort

In the report Mr. Wilson recounts how he was staring out across a vast factory floor (some of which was open to the elements) of a state owned business involved in the design and manufacture of some of the planet’s largest wind turbine machines. There was plenty of product on show in various stages of manufacture, but one thing was missing – the workforce.

When tackled on the subject by the industrious reporter the chairman of the enterprise replied that the workforce was on a day’s holiday, something that is unheard of unless temperatures soar above 40 degrees or the State calls a national holiday, which in this particular case, they hadn’t. When the reporter later talked to an engineer in the company he was told that company had been running under capacity for a year, that experienced workers had been sent home without pay, and that migrant workers had been dismissed.

The second largest economy in the world

The picture unfortunately is representative of what is happening to the Chinese manufacturing industry as a whole. It’s a glimpse into what is taking place in the Chinese manufacturing economy. The Chinese economy is the second largest in the world after that of the United States. Just one week ago the Chinese government devalued its currency by 3.6% in a serious bid to try and revive exports – a sure sign that Beijing is considerably worried.

Just a few short weeks ago the world was forecasting what might happen if Greece was to be forced out of the EEC. However there is a far bigger story brewing here in China; something that could conceivably set the world economy falling back into recession.

A woeful picture across the Chinese manufacturing landscape

Mr. Wilson didn’t just visit a couple of factories during his stay in China; he toured across the country and saw idle cranes, boarded-up factory premises and virtual ghost towns. It appears that stockpiling and the signs of over-production are all too common. It’s the result of companies being allowed and even encouraged to copy others in their success without bothering to try to innovate – a misguided policy that as demand has faltered, has led to a proliferation of redundant products with no buyers in sight.

The signs of a shrinking Chinese economy

The production and distribution of electricity, which is normally a good barometer of the economy, has slowed its expansion down and it now growing at the slowest rate for 30 years. The reduction in Chinese industrial demand has resulted in world commodity prices dropping, and even the price of gold, a usual stalwart, is struggling. Export figures were down by 8.3% on what they were this time last year, and imports continue to fall for the ninth month in succession.

Beijing papering over the cracks

Part of the problem is that up until now, with the booming economy China has enjoyed in recent years, Beijing has been able to artificially deal with economic challenges that came its way. For example during the global financial recession just a few years ago Beijing merely flooded its own domestic market with artificially cheap money, thereby creating a fictitious surge in infrastructure. At a time when the UK economy shrank by 4.3% and the US economy by 2.8%, the Chinese economy expanded by 9.2%.

All the time that the Chinese economy was able to support these measures things were fine, but now the economy is faltering, the slowdown could be made even more dramatic by the dawning of reality.

Exaggerated percentage growth rate figures

The Chinese National Bureau of Statistics reported that the economy had expanding by 7% in the first and second quarters of this year. Andrew Polk of The Conference Board in paging states his belief that the output actually grew at only 4% and that this has been the case for the past two years.

Furthermore he believes that this slower rate of expansion will continue in the foreseeable future. The problem is that a growth rate of only 3% or 4% per annum is tantamount to recession in such a huge economy.

The fact of the matter is that the rest of the world should be deeply concerned about the sharp contraction of the Chinese economy. The brief panic that came about through the fears of the failed Greek state will pale into insignificance as Greece’s percentage in terms of world economic output is only 0.3%. China on the other hand has 13.4% of world economic output. A significant reduction in this percentage is going to create ripples that will be felt by supply chains across the world.

Car manufacturing output slashed

The mood now is one whereby everyone including fund managers and large multinationals are beginning to debate seriously about what will happen if the Chinese economy seriously slows down. Car manufacturers Audi, BMW, and Jaguar Land Rover have already seriously cut back their local forecasts and have issued profit warnings. The Ford motor company is forecasting that car sales in China will fall for the first time since 1990.

Given China’s integral role in global trade in recent years this could have a significant effect on the world economy. In 2014 Beijing was the biggest importer of crude oil, copper, and soy beans; it also had a huge appetite for French cheese, Scottish Salmon and New Zealand lamb and it is also the planet’s largest consumer of automobiles and smart phones.

Global supply chains dependent on Chinese resources

The truth of the matter is that China has some sort of influence on nearly every industry with many global supply chains being reliant on Chinese land, Chinese labor, or Chinese capital somewhere along the route.

The problem from a world supply chain and economy point of view is that nobody really knows how this 21st-century slump in the Chinese economy will play out. It could be relatively short and sweet providing the economy with a chance to divest itself of a huge amount of bank loans that have been weighing it down, or it could signal the end of the Chinese dream.

Beijing shown to be incompetent

One of the great unknowns is how the current Chinese government and leadership are going to handle the situation. In their recent stocks and shares problems, the government’s heavy-handed approach has really knocked everybody’s confidence. They have been seen as being not only highly reactive but also hugely incompetent. Another example of this incompetence could devastate global supply chains and send the world economy plunging back into recession.

Is a global supply chain tsunami on the way?

It was 1976 when the Chinese economy last shrank. Back in those days a recession in the Chinese economy would not have been a major concern to global supply chains. But over the past 40 years, with China building itself up into one of the planet’s major manufacturers involved in most global supply chains, a serious shrinking of their economy could create ripples of tsunami proportions.

Is your global supply chain dependent on Chinese resources? If it is, how worried are you by current events and the forecasts of a continued decline in the Chinese economy, and what measures will you be taking in terms of supply chain risk mitigation?

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