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Video / 24 March 2014 at 12:39 GMT

Jakobsen: Why China can't fail

Angus Walker

More bad economic data from China: the latest HSBC Purchasing Managers Index shows deeper contraction within the economy, and mainly in the private sector. Is the much fabled Chinese hard landing rushing up to hit the world’s second largest economy, or can this descent be controlled by the country’s Communist leadership?     

A bit like Freddie Mac and Fanny Mae in the US during the global crisis, China’s large state owned companies will never be allowed to fail; that’s according to Saxo bank’s Chief Economist Steen Jakobsen, who argues that China hasn’t developed a private sector advanced enough to replace the mass employment currently provided by state owned enterprises.     

However in recent weeks, even companies with state ownership have been defaulting. Steen Jakobsen sees this is simply the process of weeding out tired businesses as China remodels its entire economy: ”They (the Chinese government) will accept bankruptcy in the private sector, but as we get into the sphere where the state has ownership it is a matter of picking losers and winners”.

The next PMI focusing on the state owned sector is due out later this month and if the data, as expected, indicates a continued slowdown then there'd be renewed pressure to adjust the country’s current official growth rate: set at 7.5%. That rate is unchanged since 2013, leading many economists to predict Chinese GDP falling to between 4% and 6% as the days of double digit growth look well and truly over. 

dbp dbp
This may well be true, but the concern is that any shock could set off cascading consequences across the world. And, as we have seen in the past, it has not taken much to trigger such an event, even under circumstances that have been far more stable than those current. The financial world is in an exceedingly fragile state.


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