Posted on Sep 05, 2012 by Sergio Ulloa
While the attention of the financial world is fixated on the unfolding European crisis, there is a sleeping dragon some 5,000 kilometers away about to wreak chaos around the world. The dragon is China, the world's most populous country and the world's second largest economy. The problem has been festering for years and has been somewhat controlled through governmental stimulus money but this problem can no longer be delayed - the slowdown in the economy is becoming a pressing concern for people around the world. The effects of this recession could be disastrous and would affect healthcare and international health insurance worldwide.
The Chinese government is reporting 7% - 8% Gross Domestic Product (GDP) growth this year, so how could the Chinese economy be in a recession? Many experts agree that China could be deceptive about their GDP numbers. As reported by Reuters, WikiLeaks revealed that in 2007, during discussions with Clark Randt, the US Ambassador to China at the time, Li Keqiang (head of the Communist Party in 2007) hinted at the fact that China's GDP figures were not necessarily based on real data.
This should not come as a surprise. The country is a totalitarian state controlled by the Communist Party of China. To the government of China, maintaining a strong public image to both its own citizens and the rest of the world is very important. Fortunately, investors and citizens can turn to more reliable data which can also confirm whether or not China's economy is slowing down or entering a recession.
Many economists and investors use other sets of data to help determine the strength of an economy, aside from the GDP. Even if there was truth behind China's GDP growth numbers, GDP itself may not be a good indicator of economic health in the sense that it does not take into account the general financial state of the typical citizen.
One data set that other financial analysts look towards is the Purchasing Managers' Index (PMI). The PMI is an index composed of five indicators which come from purchasing managers in a given country. This gives diversified results and provides a good sample of the economic industries. The indicators included are; production levels, new orders, supplier deliveries, inventories and employment level, with each indicator having a different weight. Purchasing managers will indicate whether their indicators are better, worse, or the same than the previous month. The index is then reported on a scale of 0 to 100, with anything higher than 50 indicating that the economy is in growth, and anything lower indicating the economy is slowing down in growth or is in recession. A number lower than 42 indicates that a recession is either occurring or is close to doing so.
The index focuses on manufacturing, and while the Chinese economy may not be solely based on manufacturing, a large portion of it is, and recessions traditionally affect manufacturing first. Even more so, factory output is significant in China because the economy has used its cost effective labour to become the world's factory, accounting for a large portion of China's overall GDP.
For China, there are two PMI numbers: one released by HSBC, conducted by Markit, and one that is sponsored by the state and is the official figure released by China. Both numbers are within tenths of percentage points of each other and it is important to note that the difference between the two numbers is due to the composition of the surveys - China's numbers focus on larger corporations, while HSBC's numbers take into account small and medium sized enterprises (SME). As SME's may be more representative of the general population, it seems wiser to take these into consideration. Despite their differences, both figures indicate a below 50 reading, indicating that the industry is contracting, but not yet in a recession.
Another indicator is the amount of loans being granted or applied for. China's banks recently indicated that they may miss their loan targets for 2012, something that has never been missed in the past seven years. Banks have a heavy dependency on the SME market for loans, not because of their loan amounts, but because of their volume. This points to a slowdown in China's economy as the fact that businesses do not require loans may indicate that there is no need to expand, or an incapability to expand. It could also indicate a business's inability to acquire the loan due to its poor financial standing. SME's health is crucial to the financial health of China's citizens as SMEs make up the vast majority of the total contribution to GDP and employment. Poor SME health could therefore indicate that the overall state of the economy is in a terrible condition.
Electricity consumption could also be used as an economic barometer. If GDP increases, then electricity consumption should follow as electricity use will generally increase in from higher productivity. However, China's electricity consumption and demand has slowed over the past few months, which seems to contradict China's picture of continuing high GDP growth. It does, however, coincide with the PMI indication that things in China may be slowing down. China is actively spending to reduce its energy consumption in spite of this, and analysts still agree that factory consumption of power is slowing.
Finally, rail cargo volume can also point to changes in actual production. Rail cargo volume for China has been declining and while there are many seasonal highs and lows, the lows for the past few months have been significantly lower than historical values. Moreover, analysts have indicated that the decrease in rail cargo volume is comparable to the amount of decrease that happened during the 2008 financial crisis, which causes alarm for many who are monitoring these stats.
There are some significant consequences that can arise if China were to enter a recession. The effects of its recession could be comparable to those of America's recession as China is the second largest economy in the world. Although a weakened Chinese Yuan as a result of the recession may encourage foreigners to outsource from China, the lowered demand from foreign companies is what contributed to the Chinese downturn - the deepening Global Recession may continue to produce lower demand for Chinese products even after the Yuan is lowered.
While the Yuan lowers, imports will decrease, compounding the effect of lowered imports due to lowered production levels. This can have significant effects around the world as China is one of the largest importers for many different minerals and raw materials, used often in their manufacturing industries.
As the Chinese economy worsens, general prices in China may increase due to lower demand and lower quantities will be sold as a result. Moreover, prices may increase because imports could become more expensive due to the weakened Chinese Yuan. Businesses may exit the market because profits are not as high anymore and may reach an unsustainable state.
In recessions, government spending is cut in order to maintain proper budgets for more essential and important aspects. As such, subsidized healthcare is usually one of the first departments to receive cuts. China currently offers a progressive subsidized healthcare system whereby the small and local clinics / hospitals receive a sizable subsidization and larger more specialized hospitals receive significantly less subsidization.
Once cuts are put in place, healthcare receives cuts, and the chances of people not being able to pay for their healthcare needs increases; costs of healthcare in emergency situations can represent significant amounts. Due to the higher relative costs of healthcare, health insurance in turn could end up costing more. This is because of the way health insurance premiums are calculated: what are the chances of a certain person requiring healthcare and how much would it cost if they do? A recession can push up the cost of healthcare and the cost of health insurance.
After the recession, because of citizens' poor financial health, demand for health insurance will be lowered. As such, many small local health insurance companies may be forced to exit the industry as well, which could see some people at loss because of lack of coverage.
Acquiring an international health insurance policy in China now, before the recession takes place, is much more attractive. If you currently have health insurance, it is a safe way to hedge your bets against the Chinese recession since your plan will remain at its current price for rest of the term, as well as any financial problems which might occur in the future.
How long might this recession go on for and just how deep into the economy could it reach? This is a difficult question to answer. If the 2007/2008 recession is anything to go by, a recession in China could pull the world into a depression. The Global Recession still hasn't concluded yet and is on the brink of further collapse.
As a sort of safety net, the Chinese government has set aside hundreds of billions of dollars in stimulus money in the event that action is required. This money will go towards cost saving measures for both the government and the average citizen, such as incentives for purchasing energy saving air-conditioners.
The real question at hand is not about the possibility of China going into an economic downturn - the real question is whether it will be a soft landing or a hard one. Some analysts think that it will be soft and that China is well equipped and large enough to absorb some of the loss. Some analysts, however, feel that their recovery from the previous 2007/2008 recession was too manufactured and that it wasn't a sustained recovery - they are afraid that there will be widespread damage across the globe especially with the European crisis still unfolding. Whether it is a soft of a hard landing, many feel that this downturn is inevitable and fast on its way.