According to the most optimistic, China will be able to encourage US and European demand, which is currently collapsing, for telephones, televisions, sports shoes and a myriad of other products. Their greatest hope lies in Beijing’s announcement of a $586 billion stimulus package. Equally important (although arguably less likely to pay the price quickly): Chinese consumers. Aware of increased infrastructure spending, expanding social assistance programs, and state directives ordering banks to provide loans, Chinese businesses and consumers will rise to the occasion. and spend more…at least in theory.
However, a quick reading of the latest Chinese economic indicators is not reassuring. In November, China recorded a 2.2% drop in exports. This is the first decline since 2001, and this trend is likely to continue throughout 2009. Growth in industrial production slowed to 5.4% in November, its level the lowest since February 2002. In addition, manufacturing activity continued to decline for the fourth consecutive month, with a PMI (Purchasing Managers’ Index, or indicator of manufacturing activity – a monthly survey measuring activity index of China and compiled by CLSA Asia-Pacific Markets) of 40.9 in November, down from the index of 45.2 in October.2008, A BAD VINTAGE
Only consumer and business confidence can reverse this trend. Although the global economy is likely to struggle to rebound again come the Chinese New Year, China is counting on consumers to revive the retail winds that are still strong. However, trust is just as scarce a commodity in China as in the rest of the world.
It is not without bitterness that Chinese city dwellers look back on 2008. Chinese stock markets fell by around 65%, affecting many economic sectors. Real estate market prices fell by as much as 10 percent in Shenzhen and other cities, and at best stabilized in Beijing and Shanghai, according to China’s National Bureau of Statistics. Then there are lingering concerns about the rising costs of medical care and education, so it’s no surprise that this national data body recorded a more than 4% drop in consumer confidence compared to the same period of the previous year. In July again, consumer confidence was on the rise, but that era now seems to be over. Moreover, the confidence in the future of very many inhabitants of rural areas and immigrant workers in China is also very rare. While millions of migrant workers will return to the countryside at the start of the year to celebrate the Chinese New Year (January 23), it is likely that many of them will come to see their loved ones without the mountains of gifts or gifts. envelopes containing money and which they usually bring back to them on the occasion of the holidays.
EXPECTED UNEMPLOYMENT RISE
Due to the export decline that has spread to provinces such as Guangdong, factories are closing, often leaving employees unpaid. As many as 70,000 small and medium-sized businesses went bankrupt last year, according to estimates by Jeongwen Chiang, associate dean of the Cheung Kong business school in Beijing. Overall, Chiang predicts that these bankruptcies could increase and affect up to 20% of manufacturers destined for export. “One of these days the growth trend was going to (sic) stop and they were (sic) not prepared for it. They don’t know how to solve a recession,” Chiang warns.
Bankruptcy trends are expected to lead to higher unemployment in 2009. And there are not many vacancies in the agricultural sector for laid-off immigrant workers either. Consulting firm McKinsey & Co estimates that an additional 300 million people from rural areas of China are expected to move to Chinese cities over the next seven years.
The 5 million students graduating this year are already struggling to find office jobs. “The current employment situation remains serious,” Yin Weimin, Minister of Human Resources and Social Security, said at a press conference in Beijing in November. But the difficulties will be even greater in the first quarter of next year,” he added, citing business failures affecting immigrant workers as the main factor.
In a protest signaling weakening consumer confidence, tens of thousands of migrant workers took to the streets in southern Chinese cities like Dongguan and Shenzhen, blocking traffic and demanding the wages that was due to them. Strikes by taxi drivers broke out in Guangzhou and the southwestern city of Chongqing, forcing local authorities to take action to quell the unrest. In Dongguan, the local labor office stepped in to pay some employees. Meanwhile, in Chongqing, former Minister of Commerce Bo Xilai met for three hours with representatives of taxi drivers in November to listen to their concerns.
Obviously, Beijing hopes that its vast investment plan (about half a trillion dollars to finance the installation of infrastructures, in particular roads, highways and housing at rent or moderate prices) will contribute to the creation of new jobs and encourage consumers to spend. The state has also ordered banks to provide more loans, setting a target of $588 billion in total loans for 2009. What’s more, it is aiming for money supply growth of 17% this year. next year, thus increasing compared to the rate of 14.8% reached at the same time a year earlier. Around mid-December, China’s State Council has issued a range of policy measures aimed at encouraging this expansion – including that of bonds issued by companies to finance infrastructure – as well as giving banks more freedom in determining their loan rates.
On December 22, China’s central bank cut interest rates for the fifth time since September, lowering its benchmark one-year lending rate and its deposit rates, respectively at 5.31% and 2.25%. “When the central government dictates a certain growth rate, local (governments) enthusiastically accept it,” says David Li, director of the Center for China in the Global Economy at Tsinghua University. This is the best way to generate growth. This could indeed confirm the growth of infrastructure investment, which accounts for more than 25% of fixed asset investment in China, according to Jing Ulrich, managing director of China equities at JPMorgan Bank (JPM) in Hong Kong. The challenge ahead, however, will lie in confirming such a strong rise in investment linked to the property and manufacturing sectors, which constitute 24% and 32% respectively of the country’s total investment and are staggering due to a excess capacity. Sales of commercial real estate fell nearly 19.8% in the first 11 months, while home sales fell about 20.6%. At the same time, industrial sectors – from steel to automotive, to toys and the textile industry – are all threatened by massive excess inventory and falling prices.
Indeed, the growth of Chinese investments in fixed assets has already decreased in November to reach 26.8%, while its rate was 27.2% during the first ten months. “We expect investment to decline in the next quarter as the export sector struggles with weaker demand and also as real estate developers will focus on getting rid of current inventory,” Ulrich wrote. in an analysis published on December 16. the growth of Chinese investment in fixed assets has already decreased in November to 26.8%, while its rate was 27.2% during the first ten months. “We expect investment to decline in the next quarter as the export sector struggles with weaker demand and also as real estate developers will focus on getting rid of current inventory,” Ulrich wrote. in an analysis published on December 16. the growth of Chinese investment in fixed assets has already decreased in November to 26.8%, while its rate was 27.2% during the first ten months. “We expect investment to decline in the next quarter as the export sector struggles with weaker demand and also as real estate developers will focus on getting rid of current inventory,” Ulrich wrote. in an analysis published on December 16.
THE DECISION IS UP TO THE STATE
It is therefore not to be expected that Chinese companies, for their part, will begin to regain confidence. And even if they were inclined to increase their spending, Chinese lenders are unlikely to suddenly invest capital in all of them…because when it comes to lending, state-owned banks of China persist in favoring large state-owned companies to the detriment of Chinese private companies, a trend which is probably not ready to be reversed, given the uncertain economic climate which currently reigns in China, affected by numerous bankruptcies. “Neither individuals nor businesses can hope for an expansion in demand…it is therefore up to the state to remedy this. “says Michael Pettis.
That fact worries Pettis: He cites both the sluggish appreciation of the yuan and the reinstatement of a host of export price discounts as signs that instead of resolving the situation, the situation may although Beijing is trying to support economic growth by encouraging exports, a move that could spark a wave of global protectionism. “If China makes the same mistakes as the United States and thinks it can get out of the crisis by exporting, without being forced to massively encourage its domestic demand, then a scenario similar to that of the 1930s will occur. So far, China has behaved as if it could get out of this situation by exporting. I’m very, very worried,” admitted Pettis,
