China -- That Sinking Feeling

One of the less reliable statistics in the world economy is the growth rate of China. It is commonly accepted that the Chinese government manipulates its GDP statistics for its own purposes. With the change in the Chinese leadership, there is concern that the figures for GDP growth will be inflated to make the new leadership look both successful. This may seem unimportant, but the truth is just the opposite. Right now, Europe is in recession, Japan is continuing its decades of essentially no growth and the USA is still limping along. Only China has been growing and providing an engine to help get the world economy back on the right track. If China stops growing, it will be a major blow to the entire world economy.

So let's look at some other indicators of Chinese growth. One of my favorites is the Baltic Dry Index and the spot markets for ship charters. China's economy is heavily dependent on international trade. When the Chinese market is humming, rates for ship charters rise. When China slows, the ship charter rates fall. Of course, there are other factors that affect the shipping rates; the supply of new ships is the most important of these. Nevertheless, the shipping rates are still a good indicator of the direction and speed of growth in China.

Yesterday, the spot price for Supramax ships was about $7700 down from about $12,300 a year ago. The spot price for Panamax ships was $5800 yesterday down from $13,300 a year ago. Cape size ships were going for $4900 yesterday compared for $28,900 a year ago. The Baltic Dry Index itself reached a low of 770 yesterday down from 1700 a year ago and 11,000 in 2008. So what does this mean? To me, it means that China is importing less iron ore for its steel plants. It means that China is importing less of other raw materials as well. It means that China is shipping less volume of goods abroad. It also means that trade in the rest of the world has slowed.

Let's be clear. These figures do not necessarily mean that the world economy is collapsing. They do, however, tell me that the truth about the Chinese economy is nowhere near as rosy as the figures emanating from Beijing would indicate.