Can China save the West?

13th Dec '08 by Murakami

11 comments 6905 reads

China’s economic slowdown is deepening, with overcapacity in almost all industries - "Exports fell for the first time in seven years last month, imports plunged and manufacturing contracted by a record as the global recession pushed the world's fourth-biggest economy into a slump". http://www.bloomberg.com/apps/news?pid=20601087&sid=aKXiB34dAAI0&refer=home

The Chinese are used to an endless improvement in personal opportunity. What happens if this bubble burst? A 4 trillion yuan ($585 billion) stimulus package kicks in from the second quarter of next year, but if this doesn't work, could there be social instability?

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About the Author

Murakami

Premium Member

11 comments

Murakami

13th Dec '08

Haunted by the spectre of rising unemployment, officials are on a campaign dubbed 'protect eight' -- shorthand for the goal of achieving 8 percent growth next year, the minimum rate deemed necessary to create enough jobs for the millions of people entering the work force each year.

http://www.forbes.com/afxnewslimited/feeds/afx/2008/12/11/afx5812889.html

Stocktaculous

14th Dec '08

I read an interesting article from the Reuters Chief Economics Correspondenct (Alan Wheatley) entitled "China economy at crossroads after 30 years of reform". The basic point is that China has prospered as a result of investment, exports and heavy industry but, with global demand slackening, it now has to stand on its own two feet and focus on boosting domestic consumption, which is a real change in focus. However, personally, I'd back the Chinese government to succeed whenever it puts its mind (and resources) to something!

Household consumption last year made up just 35.3 percent of China's gross domestic product, a record low for a major country in peacetime. In the 1980s, it was over 50 percent. By comparison, the U.S. ratio last year was 72 percent. If America spends too much for the sake of global economic balance, China has taken thrift to new extremes. That needs to change.

Stocktaculous

14th Dec '08

Forgot the article link - it's: http://www.reuters.com/article/worldNews/idUSTRE4B94K420081212?virtualBrandChannel=10341

Murakami

14th Dec '08

Interesting article - there were some key initatives in this direction announced by the State Council on Saturday:

Broad M2 measure of money supply is to be expanded by 17%
Liquidity for banks is to addressed with shorter term bills
More rate cuts and foreign exchange flexibility to be considered.
Government will encourage the expansion and development of corporate bonds, short-term financing bonds and medium-term notes
New futures for commodities, including products including steel and grain, to be introduced

So they are clearly focused on the issue but you've got to wonder though whether this sort of thing will be enough. Social stability has been maintained over the past three decades in large part because the booming economy has allowed 200 million + migrant workers to flock to the cities. With the collapse of export-oriented businesses, you could have hundreds of thousands of migrant laborers losing their jobs and returning to the countryside... Scary.

rpcroft

15th Dec '08

Very scary.

Western central bankers must be jealous of the chinese ability to expand M2 by dictat...all their bankers are communist party members and if they are told to lend they will say "yes sir" and lend. Control over both the broad money supply as well as the monetary base is quite powerful.

BUT

Who will they be lending to?

Lending to help start new productive enterprises will worsen the overcapacity.

Lending to businesses without a market for their goods will just maintain the overcapacity.

Consumer credit may prove unpopular in an environment where wages are falling and jobs security low, in such an enviroment if you find a consumer who is credit worthy he is probably saving.

I guess they will be pushing mortgages hard and giving lots of loans to the infrastructure companies who will get government "stimulus" contracts.

How they finance the stimulus package without destroying their long term competitiveness is an interesting question. After all they have maintained their competitiveness by NOT spending the money, which they accumulated through their trade surplus, at home but rather buying assets abroad with it.

Now they need that money at home keeping prices down relative to the rest of the world will be hard.

Perhaps having already sucked the world dry they dont care and will turn their back on exports and try to pump up domestic demand.

Gradders73

17th Apr '09

Everyone's looking for reasons to knock China and although I am hugely skeptical about investing in anything, I think it's a lot healthier than some would like to think. Firstly, given the rate of growth over the last few years and the huge ongoing social changes, the current decline is more of a bump in the road than the crashes we have seen in more developed economies like Japan. Also, the export economy is based upon selling shall we say, the budget versions of things, which leaves them more recession resistant.. The lack of worker rights actually benefits the economy as they simply don't have the jump in social services costs that many countries have and it makes the labour market more flexible. If there are people who can tell the younger generation of the hardships wrought by the "Great Leap Forward," they are hardly going to complain about simply being out of work.

Long term, lots of things concern me - environment and natural resources strains, lack of a service sector to mop up underemployment as manufacturing becomes more mechanised and rampant greed and corruption (which is the more likely cause of social unrest) but for now, they have sufficient reserves to continue with development and there is still optimism among the migrant workers.

I thought this was a good comment in yesterday's FT...

http://www.ft.com/cms/s/0/a67efcc4-2a1e-11de-9d01-00144feabdc0.html?nclick_check=1

Stocktaculous

22nd Apr '09

Goldman Sachs has apparently hiked its forecasts for Chinese GDP and reckons the magical growth figure of 8 per cent could be reached this year.

Aggressive policy easing and better-than-expected results from the stimulus have made a stronger case for China’s growth re-rating. Since the announcement of the Rmb4 trillion fiscal stimulus package last November, policymakers in China have been pushing the envelope on policy easing in only one direction—for more and more. The pace of implementation of new infrastructure investment and the scale of domestic credit expansion have been unprecedented. However, as we have long argued, one should probably discount some of the official statistics for quality/seasonality reasons, especially in any one particular data series. We believe the message from the aggregate macro data along with other anecdotal evidence, such as domestic commodity demand, is clear: the aggressive policy stimulus has been working.

http://ftalphaville.ft.com/blog/2009/04/22/54976/some-more-green-shoots-china-edition/?source=rss

Gradders73

22nd Apr '09

One thing I can't really get my head around is how the heck you calculated Chinese GDP anyway. With the best will in the world and a million economists you could still have a margin of error of at least 5%. I mean, the millions of dodgy DVDs they've sold over the last few years won't be in there for a start...

Stockhound

7th Aug '09

In reply to Gradders73 (post #8)

In support of your earlier point, there was an article in the FT recently about the contradictions in China's GDP stats:

China's gross domestic product figures are among the world's most closely watched since they can move markets or boost hopes of an imminent recovery. But the latest set of first-half numbers provided by provincial-level authorities are far higher than the central government's national figure, raising fresh questions about the accuracy of statistics in the world's most populous nation.... With the rest of the world looking to China as a beacon of expansion, the discrepancy is a reminder that statistics there are often unreliable and manipulated regularly by officials for personal and political purposes.

Is this just sour grapes though given that they are in growth mode while the rest of the world languishes in recession - does it really matter if it's 6.5% or 8.3%?

Still, apparently, even the state-controlled media is asking questions...

The Global Times, controlled by the People's Daily, the Communist party mouthpiece, reported that the public reacted with "banter and sarcasm" to NBS figures showing average urban wages in China rose 13 per cent in the first half to $2,142.

http://www.ft.com/cms/s/0/bcaf3758-8157-11de-92e7-00144feabdc0.html?nclick_check=1

Stockhound

11th Aug '09

The latest data out of China is being pored over by commentators - a mixed bag but the general consensus seems to be that it's mostly positive signs (assuming you can believe the numbers), although it's clearly driven by the stimulus.

Exports for July topped $105 billion, 23% less than exports last July but 10% more than June
Retail sales rose more than 15% this July compared with the same month last year, sugggesting that domestic consumption will help make up for declining exports.
Industrial output also increased 10.8% in the year to July, the highest it has been in nine months.
Deflationary pressures remained intact, with the monthly CPI dropping 1.8% from the year-earlier month, while the producer price index fell 8.2%!

China's surging economy slowed slightly in July as state-controlled banks heeded Beijing's instructions to rein in excessive lending, with the volume of new lending dropping 77 percent from a month earlier. Most economic indicators however suggested a continuing strong recovery, largely as a result of government investment and state-directed lending that saw new loans nearly triple in the first seven months from the same period last year.

http://edition.cnn.com/2009/BUSINESS/08/11/china.economy.ft

http://www.google.com/hostednews/ap/article/ALeqM5j1FZRNA_nf7XY7YePH-Od-tdunFAD9A0FTG00

Stockhound

11th Aug '09

p.s. Positive spin/interpretation from economist Stephen Green (Standard Chartered Bank).

"Exports are running about five percent month-on-month growth at the moment, and imports are running seven percent month-on-month growth, so this is suggesting simply that the economy is recovering, it's growing," Green said. "But because we contracted, particularly on the trade side at the end of last year, we're still not yet up to previous year's levels, and quite a long way down, 15 percent down at least in terms of the exports."

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Murakami

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