We expected economic conditions in China to deteriorate faster (at least for the next few months) than most had forecast, and that seems to be coming to pass. From Reuters:
Chinese factories slashed output and workers at a record pace in December and manufacturing activity overall fell for a fifth month as the global financial crisis hit export demand, a survey by brokerage CLSA showed on Friday.
The figures, which CLSA said showed a sector close to recession, spell further gloom ahead for the Chinese economy and highlight the urgency with which the government is trying to cushion the country from the effects of the global crisis.
“Chinese manufacturing activity was very weak in December…,” Eric Fishwick, head of economic research at CLSA, said in a statement.
“With five back-to-back PMIs signaling contraction, the manufacturing sector, which accounts for 43 percent of the Chinese economy, is close to technical recession,” he said…
Official statistics showed that factory output grew just 5.4 percent in the year to November…
While the government is aiming to maintain growth at 8 percent in 2009 — down from the 9.9 percent annual pace in the first nine months of 2008 — many economists say growth could be well below that in the first half of this year.
The PMI suggested tough times ahead for manufacturers, which could demand a stronger policy response from Beijing.
New orders continued to shrink in December, at the second-fastest pace on record and marking the fifth straight month of contraction. New export orders also declined at the second-sharpest pace in the history of the survey.
Firms’ backlogs of work fell at the sharpest pace on record, and they accordingly cut their work forces by the biggest margin ever, boding ill for the government’s efforts to preserve as many jobs as possible to help maintain social stability.
19 comments
Comments are closed.
Theme song to “Jaws Movie” playing in the back ground for this one.
China’s export-driven economy more closely matches the state the US was in the 1930’s – than that of the western economies. While Bernanke and co are desperate to avoid making the same perceived errors of the 1930’s – it is China who can most usefully apply those lessons.
One lesson is the ascendancy of a property-owning middle-class. The Chinese ruling elite are scared of internal revolution. Nothing prevents unrest better than making most of the population coservative stake-holders in stability by owning their own houses.
A convertible yuan pegged to gold and continuation of national infrastructure projects are also desirable.
Big differences with 1930’s US as well. The country is not a democracy and does not have the sophisticated pressure releases of the US constitutional system. Also, their growth is built strictly on low wage labor. The US was home to major inventions like the airplane and light bulb by 1930 and was already a cutting edge country in terms of technology. Frankly, most educated Chinese want to move to America. We talk about a US – China rivalry, but Japan has no plans to let their technological edge over China diminish, either. There is no way out for China if the current economic situation persists. Their best hope was for continued world economic growth, and to develop a value-added industry that could build a niche within that growth. They are not going to develop a value-added industry while facing fierce regional and international competition, in a declining world economy.
Maintaining 8 percent growth in 2009 looks like pie in the sky at first glance to me. There may be one card that the Chinese have up their sleeve that many are forgetting though. Namely that the trade agreements with China which place limits on clothing for example are due to expire during the early part of 2009. CITA (the Committee for the Implementation of Textile Agreements ) recently confirmed that Electronic Visa Information System requirements for mainland Chinese textiles and apparel currently subject to quota will be terminated effective with respect to all merchandise exported on or after 1 January 2009. There are some limitations on over shipments up to February the 1st ,but as it stands the US Textile industry could be decimated.
U.S. Trade Representative Susan Schwab stated last October that an initial analysis by USTR staff confirms that some chinese subsidies raise serious WTO issues and that while the current administration probably does not have enough time or incentive to initiate a case against China, the Obama administration is expected to seriously consider that possibility.
This has trade war written all over it as over half a million US jobs are at stake alone in the textile industry. We all know that china holds most of the cards so to speak in any negotiations while it sits on a pile of US treasuries, so it will be interesting to see how tough Obama will be.
Wen said China would devise more detailed programmes to boost domestic consumption and China would accelerate public spending in the research and development sector.
He said China would provide subsidies for home appliances in rural market for five years, which alone could boost rural household spending on televisions and mobile phones by 500 billion yuan ($73.3 billion).
We visited Gold King Group, the world's second-largest candle maker in terms of market share, saying the company had done a great job of maintaining stable business in a difficult environment.
"I hope the whole world can feel the warmth from Chinese candles," Wen said.
http://www.iii.co.uk/news/?type=afxnews&articleid=7095104&action=article
Better hope they succeed or the Chinese candles may end up warming the world with nuke tips.
When oh when will these dumb shits awaken ? They have a billion people, yearning to consume. A little domestic shop till you drop could take up the world slack in a heartbeat if they only had the coinage. The United States of Wall Street transferred the accumulated middle class retirement wealth to them to get them to start consuming, for crying out loud. And what did they do, they saved it.
Maybe it really is true. Asians are very, very smart but not creative. We need to send the Bernanke squadron to China, loaded with yuan, pronto.
One lesson is the ascendancy of a property-owning middle-class.
You need a middle class before you can have a property-owning middle class. China’s middle class is proportionately small and overwhelmingly urban in a still mostly rural country. To create a large middle class China would have to veer sharply from its pro-insider pro-owner pro-city biases to pro-populace, pro-worker, and fair on city vs. country. It would still take years so they can’t solve the current problem by going bourgeois. They’re also coming off a big property bubble so for the middle class to buy houses now would result in their impoverishment – probably not good for stability.
Scenario: China sells its US Treasuries but puts the proceeds in offshore dollar cash deposits. This (on top of gargantuan US borrowing in 2009) pricks the bond bubble. Interest rates on US 2yr to 30yr Treasuries soar. The dollar takes off, rising to who knows where. China does not follow the dollar, thus (once again) cheapening its exports.
Questions for the class: (1) Is this possible? (2) What would the US government do?
> China's export-driven economy more closely matches the state the US was in the 1930's
Actually I would say it more closely matches the US from 1915 – 1920. During that period US loaned Europe 7 billion dollars for the war and 3 billion for reconstruction (1/4 of US GDP). Europe spent quite a bit on this on good manufactured in the US. The US recession after 1922 was not particularly nasty, but the dollar lost half it's value from 1915 to 1920.
“A convertible yuan pegged to gold”
This is inversely equivalent to pegging the dollar. No better off.
The current economic global strategy China has been deploying is sound (if a little painful for American eggheads to be comfortable with); it is congruent with a venture capitalist funding a hard working entreprenuer (VC’s are vicious bastards). They are peggy the Dollar at a level below par (global dollar value) to keep exports robust. By keeping it low they are getting the intrinsic value from their laborers back instead of from a financial source to get the new venture off the ground. Brilliant. The labor productivity of its people will be the near term solution for its steady course through this temporary Typhoon that is justing getting ashore.
Modigliani-Miller Theory says it plainly – “work hard and the free cash flows are all that is really important – financial jargon and debt is for bored lazy 1st rate economies”
Anon 958 – "We need to send the Bernanke squadron to China, loaded with yuan, pronto." They might not be very creative but smart enough to know that Bernnanke & Co. have created one big mess and no exit.
If India was not there, China could pick up what they provide and stabilize output no?
No one should expect China to cut its savings rate and consume more anytime soon, as the Chinese government provides no safety net. There is no welfare or social security in China. Those Chinese who make enough money to save anything (aside from the wealthiest few) save prodigiously, because they are afraid of what might happen if they do not.
Furthermore, many services that are supposedly free in China, come only with under the table payments. Such things that require under the table payments in China include medicine, surgery, and good preschools. Another reason why high savings are important to individual and family survival. The Chinese are NOT going to be able to replace export demand with internal consumption without revamping their society in many profound ways.
One more point. While the consensus seems to think that China will eke out positive economic growth in 2009, I think outright recession in China (as some have suggested here) is highly likely. Since, as has been widely reported, Chinese electricity use has been falling, year-on- year, it is hard to believe that the economy is growing much; government doctoring of output statistics is more likely in my opinion. Furthermore, in an economy that recorded breakneck growth for so many years that also contained a very large state-owned sector, there were bound to be huge mistakes in capital allocation that will be revealed as output falls. The large number of Chinese toy factories that have shut down for lack of US demand are an example of this; no doubt more will become obvious. As Warren Buffett says, “When the tide goes out you learn who has been swimming naked.”
The nation’s industry structure is so skewed by mindless pursuit of GDP (as a number) growth that it is impossible to avoid an adjustment that is painful, or rather, extremely painful. And watch out for the social unrest. The biggest issue though, and probably the single factor most similar to the US govt, is that the Chinese have no playbook too.
Seems to me China has been doing about it all it can do in terms of infrastructure spending.
Sichuan earthquake, 2008 Olympic Games, building boom in the coastal
provinces, power plants, Three Gorges etc.
What else can they do? Investment is already over 50% of GDP! With rising unemployment, bankrupt factories etc what is going to induce a $2000/year worker to go on a spending spree?
Glen said: "They might not be very creative but smart enough to know that Bernnanke & Co. have created one big mess and no exit."
How so, glenny
What would happen if they turn violent and overturn the red capitalists ? Mao II …
All those factories …
i’m a dreamer
So Yves, Menzie Chinn has two great articles over at Econbrowser on collapsing trade financing, one of which you linked in on 29 Dec. They largely bear out the issue you have been following—trade financing in fact _does_ seem to be contracting—but the added detail begins to fill in some of this picture. Chinn's main points culled from the press and elsewhere:
1) Big players—Wachovia—have exited trade finance period
2) Most big players did not actually hold the LC obligations _but resold them in secondary markets_ to smaller banks; now, those buyers are non-existent. Presumably, the former major players don't want to hold the committments on their own rotten books.
3) Most LCs that count are dollar-based, and dollar financing generally is getting pulled from many emerging markets, or marked up so severely—Brazil was mentioned as a country so afflicted—as to wipe out trade contract profit, and so wipes out the deal.
4)Some exporters, notably mentioned in China, are wary of the financial stability of their US counterparties, and so are pressing for tougher guarantees at the same time as dollar-based financing &etc. is vaporizing.
The issue with trade impedence seems to be less that any one large trade-financing bank has pulled credit from Customer(s) X than that _ALL_ of the parameters which affect financing have been ratcheted in a notch simultaneously. But to me, number 2) the vanishing repurchaser market was both new and telling: trade finance seems to have been converted to yet another fee-generation product by the banking majors, and so obviously now that they have to carry the costs and book the risks _themselves_ they want as little to do with it as possible. This will end badly. Or more probably, "Hello, Ex/Im Bank, Savior of Our Prosperity."
Annon 1044: You don’t need me to tell you that China has been watching, adapting and exploiting Western economic trends for decades. When the US started the “outsourcing” industrial craze to Mexico, China adapted and became a cheaper manufacturing base. While the Western world rolled with floating currencies, China deliberately undervalued and pegged the Yuan to the US$ creating a massive and ultimately dangerous trade imbalance. While the Western world gorged on debt, China saved. Now we have the “crisis”. When compared to the Western efforts, China’s responses have been relatively benign given the size of their surpluses and population. Interest rates have been reduced but not as aggressively as Western nations have (bubble weary?) while their stimulus package was a shade over $500 b most of which was a re-packaging of existing programmes. Chinas been burnt buying crappy US Treasuries and investing in shonky US financials and as a result are in no mood to bail out the US and will do what it has to to support themselves in their own time and space. China will have it’s own financial crisis given the debt laden SOE’s and banks but I’d expect that their response will be somewhat more involved, controlled and measured as opposed to BB and HP’s woeful free for all handout to their banking mates. The big down side with China is that they’re more concerned with controlling their image as opposed to dealing with facts. Will be interesting to watch.