Thanks to Bill Bishop (see below), I read Brad Setser’s post entitled “If you only read one thing on China this fall” praising the World Bank China Quarterly report by David Dollar and Louis Kuijs. In fact, there is a online Q&A with the authors in a live online discussion on December 1, 2008 at 8am EST, which is 13:00 GMT/UTC and 9pm in Beijing. More information here.
I’ll follow Setser’s lead and not try to summarize the 23 page report. But here are my quick takeaways:
- Export – Slowing growth has so far affected different segments at different levels. For example, light manufacturing including toys and textiles have declined quickly, but higher-value machinery, equipment and electronics have held up better. Not sure if this will persist in a rougher 2009. But this means certain areas (like Guangdong’s Pearl River delta) are affected more greatly than others.
- Real Estate – There has been a “pronounced slowdown” in real estate, in part because of government policy aimed to control speculative excess in this market. But as a result, “real estate investment growth is now close to zero” and “upstream” industries like steel and cement have been affected sharply.
- Financial Sector – However, this real estate weakness will not affect the financial sector or households as much as they have in the West because of lower levels of leverage.
- Domestic Consumption – So far, domestic consumption has not been affected that much.
- Inflation – Inflation is no longer a concern.
- RMB Exchange Rate - RMB has appreciated as the USD has appreciated vs. other currencies (except JPY). This is not likely to change.
Everything is consistent with my earlier post on the effects of the economic crisis on China and my uncle’s three-legged stool model (with two legs broken) of Chinese growth: export, real estate, government spending.
I found one statement disturbing:
The experience in earlier global downturns suggests very weak export growth in
2009, even though China’s exports are likely to outgrow world imports significantly.
Box 1 describes how continued gains in global market share have allowed China’s exports
to keep growing during previous global downturns. In line with this experience, we expect
that China’s exports will continue to gain overall market share in 2009, allowing for
positive export growth in a depressed world market.
This means that China will still be increasing its overall export share and exporting the problem of overproduction to the rest of the world. This means that China will be a deflationary force as products are dumped onto the world market as companies and provincial governments in China try to maintain employment.
Setser’s highlights seven key takeaways:
- China was no workers’ paradise during the boom years
- China really is a manufacturing and investment driven economy.
- China’s current slowdown was made in China, not in the world
- There is more bad news ahead
- The fiscal stimulus is real, but modest.
- The last thing anyone needs to worry about is fall in Chinese demand for US treasuries.
- The way China manages its reserves matter immensely for the world not just fo China.
See the Setser piece for more explanation.
A hearty hat-tip to Bill Bishop for highlighting this Setser piece. An excellent source of China financial and business infomation is from Bill Bishop. I follow him via his excellent Google Reader Shared Items feed and also on Twitter at http://twitter.com/niubi. Thanks Bill!
Continued exports from China are likely to lead to strong pressure in the US on the Obama administration for tariff protection in the US. This will lead to more US manufacturers, now in China, to look at manufacturing in the US and employing American workers. I expect some American companies to market “Made in the USA” as part of their marketing message, and appeal to badly battered American consumers.
This will lead to a new round of protectionism which for most people, will be more appealing than this current round of dingbat globalization following Doha. This excess inventory in China will eventually force the Chinese government to use market forces to stimulate Chinese consumer demand, instead of just relying on administrative controls.
Agree, except that there is pretty strong consensus that domestic consumption will take a while to build up. I suspect that Chinese consumer demand for products is pretty consistent with global tastes, but perhaps with a different cost perspective (in other words, much more price sensitive in many product areas, but still craving luxury and branded products at world prices as well). Industrial demand sounds pretty segmented with a local market that is extremely cost sensitive. So it will take some time for the export market to adjust to serve a domestic market.
Your scenario of protectionism could indeed play out. And in my earlier post, I shared that Pettis believes that it might even be good for the industrialized countries and be disproportionately bad for China and exporters.
The greatest challenge for the Chinese government and financial system is that it continues to disproportionately favor SOEs and strategic industries at the expense of the Chinese private sector, which has great difficulty finding financing. (Up till now, Chinese private companies got funding from VCs and hedge funds. Guess what happened to the hedge funds?)
Everything I see indicates that we are on the cusp of an economic secular change as IT technology (with cloud computing and everything else) is switching in favor of much smaller companies which will be able to do much more without the burden of a huge workforce which is simply inefficient. (Labor costs in China are not high, they are just inefficient.) If Chinese government administrative measures continue to favor large SOEs, then Chinese companies will become less competitive, while private industry will be starved from lack of capital for expansion. If this happens, then the Great Chinese Consumer Expansion will never happen as these Chinese will rapidly be heading for their empty nest years, and will switch to saving instead of spending, and China’s currently modern infrastructure will quickly become old, decrepit and poorly maintained. Let there be no mistake about it: time is not on the Chinese government’s side.
If that happens, then China will have missed yet another chance to become a modern developed nation. And it would have been the best chance it had in four centuries. Who knows when it will have another chance?
The focus on Chinese domestic consumption is misplaced. The people are future oriented and therefore have higher levels of savings. In a free economy, whatever the ratio of consumption and savings is the natural rate. As with the U.S., the focus should be on government intervention in the economy. If gov’t policies are suppressing consumption, just as the U.S. gov’t suppressed savings, then there will eventually be economic depressions as assets are moved from unprofitable sectors to profitable ones.
“If gov’t policies are suppressing consumption, just as the U.S. gov’t suppressed savings, then there will eventually be economic depressions as assets are moved from unprofitable sectors to profitable ones.”
In China, all banks are owned by the government and follow party guidelines (which are more focused on social stability than on ROI) for investment. And there are no real alternatives for business funding aside from those banks. Plus, the RMB is not a convertible currency so people cannot move their money to Hong Kong or other places where they can seek higher returns.
For this reason, your statement comparing China to the US economy does not stand up.