At the end of last year I posted on this website a review of China’s political and economic situation (Annus Mirabilis et Horribilis), examining how it had come out of a year of wonders and catastrophes – through snow disasters, trouble in Tibet, an earthquake, Olympics and milk scandal – to find at the end of it the economy entering its worse depression for thirty years. In the same year that it was celebrating the 30th anniversary of its open door policy, China saw its overall trade cut by nearly 30% yoy (taking January figures) and unemployment rising up into the tens of millions, and doomsayers speculating that this year’s GDP growth would fall below 6%. I’d like to take a snapshot of where China is four months on and to examine what the government is doing about it, with some examination of the resolutions made in the recent National People’s Congress.
Let’s first of all look at the figures. The first point to make is the obvious one, that China has not been immune to the world’s financial collapse and its economic figures show similar shocking declines as you see anywhere. GDP growth declined last year to 9% overall from nearly 13% in 2007. The precipitous nature of the decline is palpable when viewing the macroeconomic statistics from the last few months. GDP fell from 9% in the third quarter to 6.8% by the end of the year.
Naturally the most severely affected area was foreign trade which, taking annual figures had fallen to 17.8% growth from the average 23% growth of which we had become used to in recent years. In sheer amount of trade 2008 was a record year for both imports and exports but that was a result of high growth in the first half of the year rather than the last six months.
There is a point to be made here, in that China’s trade figures were deceptive, or rather, because of so many components that had to be imported to fabricate its manufactures, in the high end electronics and other areas for re-export as finished goods, there has always been a high cost to China’s exports (one dollar out of three in the export figures had been paid out already in imports) and there are those who argue, in the present financial straits, that if China can shift its manufacture to supply internal markets then its profit will be higher – but that said, the decline has been absolute, and by any standards China is suffering now.
There was a sharp fall from midway last year reaching negative yoy growth by November. By February total trade was down minus 25% yoy. It is true that there has been a slight recovery in imports in the last two months but the jury is still out whether it’s a dead cat bounce. It is true that depleted warehouses in the West are replenishing orders and some closed factories are even reopening but it is too early to be too hopeful. It could be the W factor at play, which is common in a recession.
We should not underestimate the devastating effect on coastal provinces like Guangdong, Shandong and Jiangsu where largely the manufacturing for export is focussed. Bear in mind the relatively large proportion these provinces have on China’s GDP growth (Guangdong, Shandong, Jiangsu and Zhejiang between them account for 40%) and one can see immediately how decline in foreign trade has affected the overall economy. The effect already throughout China has been, according to the Academy of Social Sciences a closure of 670,000 businesses with 20 million migrant workers being put out of work. Official registered urban unemployment was 4.2% at the end of 2008 but taking into account the loss of migrant jobs the real unemployment figure could be as high as 9.4%.
The worst hit province is Guangdong, which on its own accounts for nearly 12% of total national growth. Its GDP yoy has fallen to 5.9%, lower than the national average. Like every province in the country it has targetted for 2009 a more than 8% growth rate, but judging from its performance in the first two months of 2009 (no dead cat bounce here, no bounce at all) it is difficult to see how it will manage it, or how there can be a recovery in any real terms for an export orientated province like Guangdong until Western economies recover, and as we all know that is unlikely for years to come.
At the same time imports and exports have been falling, so has the amount of foreign direct investment, which by January was falling yoy by more than 30%. For China it’s been a double whammy on both sides of the external equation. Foreigners, hard pressed at home, have reduced both their trade with and their investment into the country.
So far we have been looking at how the global financial crash has affected China in direct terms as related to trade and investment, but we have not so far taken into account its own internal problems and how they have been playing out in the economy. As we know, China is to a certain extent ring fenced. Its currency is nonconvertible. Its banks have had only minimum impact from the financial meltdown caused by the credit crunch that have decimated financial institutions overseas – but independently they have had problems of their own. Let us recall what was occupying the minds of decision makers at the beginning of last year.
A year ago China’s leaders were mostly worried about inflation and rising prices, and at the 2008 NPC brought in measures to combat it by adjusting interest rates, with dramatic effects. At the same time as the outside world was reaching its crisis, Chinese industry was facing tougher times brought on by their government’s own austerity measures. Wen Jiabao’s measures to combat inflation were partially successful and, over the year, inflation came down dramatically both in terms of CPI and PPI. However, the government was criticised for over reacting and restricting credit too severely, thereby creating a slowdown of the domestic economy that was too sudden.
When the world meltdown occurred in October the Chinese government was quick to reverse the interest rates, but by then the deflationary process could not be stopped and as we came into 2009 we’ve seen the falling off of retail sales and the spectre of recession. This has little to do with the global crisis. It is an own goal of their own.
Amongst other things it broke the bubble in the real estate sector with a dramatic collapse of house prices throughout the country, plummeting from a 7% growth in July last year to negative territory by the end of the year and now prices are still falling to the tune of about -1 % yoy. I’ve heard it explained to me that the loss in real estate value can be calculated as nearly 4 trillion RMB, equivalent to the whole of Wen Jiabao’s stimulus package. Bad news for the real estate and construction industry, and the economy as a whole, which up to now has relied heavily on real estate and construction for its growth figures.
The disasters that still beset China were not only economic. After a year of snow storms, earthquakes and landslides, one of China’s worst ever droughts has hit the north, with almost 43% of the country’s wheat affected – and the drought still continuing.
And naturally all the gloom and uncertainty has caused a frisson of anxiety to ripple through a generation of Chinese who have grown up thinking that economic prosperity had been guaranteed them.
The job market for college-educated Chinese, even those with degrees from top universities here and abroad, has tightened. China’s Human Resources and Social Security Minister has warned of a “grave” employment situation. China has 6.1 million college students due to graduate this year, and another one million from last year are still looking for jobs after they failed to get a job in 2008.
For the first time in decades unemployment is an issue. The government has ordered state-owned companies not to lay people off. About 20 million of China’s migrant workers have returned home after losing their jobs as the global financial crisis spreads. That’s about 15.3% of the 130 million migrant workers in the country. This will have an impact on the income of farmers, since about 40% of their income actually comes from these migrant workers who send a proportion of their pay checks back home.
By any account China is facing severe and unprecedented problems.
One would be expecting China to be entering the same state of despair as anywhere else on the planet – but strangely, it hasn’t. In fact, it’s an odd feeling for those of us who live in China and travel to economies in the West, because the gloom there is so different from the mood in China, where after the first shock at the end of last year, everybody seems to be optimistic. I’d like to have a look at why this might be so.
Firstly, there is strong, confident leadership from the top. There has been none of the hysterical panic that we have seen in some Western Governments
From the first beginnings of the crisis the reaction of the Chinese leadership has been confident and decisive. I remember when I was in Hong Kong in November last year the stock markets were crashing and I felt for the first time the mood of despair that had overtaken the world at large. That same week Prime Minister Wen Jiabao was in Moscow, dealing with Putin on one hand and Europe on the other but he found the time during those few days to oversee a cut in interest rates back home and send off a ten point plan to assist Hong Kong. I remember how impressed I was by his bold handling of crisis, and bold was never a word I had ever associated with either Wen or Hu before.
At the beginning of this year Wen Jiabao led a Chinese delegation to the World Economic Forum in Davos, where he castigated the Western powers for their irresponsibility in not regulating better the world financial system, blaming a relentless pursuit of profits for the worst financial crisis since the Great Depression. During the same trip he travelled to Great Britain and gave a speech at Cambridge University. All the press focussed on the student who threw a shoe at him, an incident the Chinese Prime Minister brushed off with dignity – but the content of his speech was actually much more interesting. It was the first time that I have ever heard a Chinese leader describe China as a great power. Usually China’s leaders refer to it as a developing nation. Also interesting was his clear exposition of how China was reacting to the crisis and what measures it was taking for recovery. The framework in which his words were couched was one of morality and responsibility.
Since then China has been standing confidently on the world stage, addressing the rest of the world from a new position of moral authority, playing a decisive role in the G20 summit in London and being accepted without reservations at the top table that had been denied it before. Just recently China has been suggesting that there should be new financial order with a new currency to replace the dollar as the world’s benchmark. Never before has China taken on the mantle of a great power, matching its actions to its rhetoric. Whatever else the financial crisis has resulted in, there has been a strong shift in international power, with China’s leaders rising to the opportunity and responsibility. The latest catchword in foreign affairs discussions is G2 (although China to its pragmatic credit disavows any such ambition.)
Despite all its economic problems China has been quietly sorting out diplomatic issues in its own back yard. In a dramatic new turn in troubled Straits relations, the most senior visit ever was made by a Chinese official to Taiwan, resulting in deals on direct flights and a complete shift in a previously intractable relationship. This again is a sign of strength and maturity. China has also offered to take some of Taiwan’s exports previously directed elsewhere. This gesture I found on a recent visit to Taiwan was much appreciated.
Similar maturity and confidence was very evident in the celebrations of the 30th anniversary of its reform and open door policy when it used the occasion to to affirm its continued participation in the global order, with strong commitment to free trade and warnings against protectionism, directed at the USA.
Since then China has been putting its financial muscle into action. The trade minister, Chen Deming, recently took a buying delegation to Europe and signed contracts of 13 billion dollars. Chen Deming said this was only the beginning.
Meanwhile China’s sovereign funds and its resources companies have set off on an aggressive bid to purchase mines and oilfields abroad. China’s aluminium company, Chinalco, is bidding for assets of Rio Tinto to the tune $19.5 billion. The proposed deal would be the largest overseas investment by a Chinese company in history.
China National Petroleum Corp (CNPC) announced that it has signed a deal with the Iraqi government and is going to be starting a US $3 billion project. It is bold expansion on several fronts.
China, far from being cowed by crisis, is being opportunistic. The falling prices of commodities around the world has given China the opportunity to buy strategic resources, and while the container shipping business around the world is stricken, bulk carriers in the last couple of months have had a bonanza shipping vast quantities of nickel, copper and other minerals to China’s ports. Oil tankers are following in their wake and, as China takes advantage of the low price of oil, storage facilities are expanding in Dalian and other ports.
This is not the behaviour of a country rattled by the global crisis. It is the well calculated policy of a country playing on its strengths rather than its weaknesses.
And these strengths are many.
The economic statistics we have looked at earlier are dire, but there are several factors that indicate that China is uniquely capable of dealing with the crisis.
First of all, its financial management over these last few decades of growth have left it with a strong exchequer. While other nations have been squandering their resources accumulating large public sector deficits, China has been prudently growing its foreign exchange reserves. Last year they stood at 19.5 trillion USD. And it is not saddled by national debt.
True, much was invested in American paper and China has made losses as the dollar has declined against the Renminbi, but it has not withdrawn its money, rather it has invested more because it sees its own self interest as well as its responsibility to bolster the international financial system as much as it can – and it has plenty of reserves to spare so can afford to do so and deal with its own national problems.
Another thing, China’s banks after all the reforms and settling of non performing loans after the Asian Crisis of 1998 has left its financial institutions in good shape. One of its banks, ICBC, is now the largest in the world, with no harrowing debts, and money to lend.
And that’s true of most of China’s other banks. While the rest of the world is suffering from a liquidity problem, China’s banks are in a position to fuel growth in the economy, and will play their part in the stimulus measures that China’s government has launched to rescue its economy.
Indeed, it is the State-owned banks who are providing the financing for the 4 trillion RMB stimulus package announced by Wen Jiabao at the end of last year. The Government will fund only 30 per cent of the plan itself. It is early days and it will take some time to see the effect of it but compared to other stimulus packages being announced in other parts of the world, I believe there is a strong likelihood that it will succeed.
First, the money is available and coupled with each province’s own separate stimulus plans the eventual sum is likely to be much higher, some say as much as 18 trillion RMB, although it will be months before all the plans are revealed. There are also ample reserves for additional stimulus packages in the future.
Another thing going for the plan is that the money is to be spent in areas where it will have an immediate effect on GDP growth – infrastructure in particular, for China is still a developing economy and every new road and every new rail track will have an effect. I remember a China Railways official once telling me a statistic that keeps him awake at night because of its implications: China has 25% of the world’s rail track and is carrying 50% of the world’s goods. That shows the necessity for expansion. Whatever money is spent will grow the economy over time. This is not by any stretch of the imagination good money going after bad.
The biggest results from infrastructure spending will come in over the next few years as new economies are created in inland areas. More important in the short term is to generate consumption through services, and here the money being planned for health and education are key. The stimulus package is already after only three months showing signs of an effect in inland provinces, but what is disappointing to the government, despite all their high profile propaganda efforts to get peasants to buy white goods through discounts etc, is that in these inland provinces renewed growth is not yet being translated into increased consumption.
China’s conservative population are the highest savers in the world (savings now stand at 50%). This is because it is in the psyche of the nation, in the absence of any welfare programmes, to keep money for bad times to come. Until recently a serious illness could bankrupt a family. A national system of healthcare and health insurance, however, will release that anxiety and allow savings to come into the economy. In the same way, those saving for education and a hope of a future will spend more on other things if education can become free or subsidized. This is precisely what the government is planning in rural areas. The aim is to effect a major unlocking of wealth. (And by the way, the Chinese populace still has their wealth intact. There have been no mortgage spirals and borrowing on the never never here.)
Affordable housing is also important. I earlier mentioned the decline in housing prices but really this loss has been in the high end sector. There is still more demand than supply in the public sector. Like education, a house for their children is seen by Chinese families as an aspirational investment for the future. Money spent on housing the poor will reinvigorate construction and bring stimulus to the economy.
A third factor worth mentioning is that the Party, which we saw micromanaging disaster last year, is behind this plan. The one advantage of a totalitarian state is that it can get things done quickly and effectively (we saw it in action during the Sichuan earthquake last year). We are now seeing a government and state mobilising all its united resources towards stimulating growth. There is nothing quite like this dynamic anywhere else in the world.
Last month the National People’s Congress was held in Beijing, and in his work report, Premier Wen Jiabao announced with enormous clarity how he expected the stimulus plan to work. The world press, used by now to governments following one ambitious and panicked rescue plan with another, fully expected Wen Jiabao to announce at the Congress a new stimulus plan to follow on the heels of the last one. Wen didn’t make any such announcement. He told the journalists who quizzed him that he first wanted to see the effect of the existing stimulus plan. “Yes,” he told them, “we have other “bullets” or even “cannons” to shoot when the time is right – the flexible usage of high foreign exchange reserves, the low government deficit, the high deposits allowing expanding loans for the economy, all these can come into play – but let’s see first the results of the first quarter and the effectiveness of what we are doing already.”
These are the words of a cool headed statesman. Wen Jiabao also announced goals that surprised many foreign observers by their confidence.
What startled everybody was that he announced firmly that China’s GDP for 2009 will grow by 8% – this after most foreign financial institutions and even the world bank were doubting growth would extend much over 6%. He admitted it would be difficult but he said it was achievable. He expressed, as we’ve said, full confidence in the first rescue package, refinements of which he also announced, describing for example how money supply would increase by 17%, with 5 trillion in additional loans. There would be more money for earthquake recovery and support for small and medium size enterprises, science and technology and employment plans. He again emphasised health and education. He announced that this year the government will spend 293 billion RMB on this alone – a serious amount of money, 17.6% up from last year, including the establishment of a universal health care system.
All in all it was a comprehensive programme by which China could create its own self sustaining domestic economy to counter the losses from reduced trade caused by the world financial crisis, with a boosting of domestic demand as the key. Observers I talked to afterwards who had attended the sessions, even the most cynical, talked of the measures which Wen had described in terms of “pragmatism” and “sureness” and above all “confidence”.
Confidence.
The strangest thing is that, despite all those depressing statistics we saw earlier, most Chinese, and many of the long term foreign residents in China, seem to share the prime minister’s optimism.
There was definitely a catching of breath, and a visible downturn in the months of November and December, but by the Chinese New Year, more and more people began to speak in terms of China’s tsunami having passed. Walking through the streets of any major city in the country, one only sees signs of life going on as before. Real estate touts are back selling apartments, even luxury ones, and people are buying in large quantities, many as investments. One hears stories of big real estate companies, which by rights should be reining themselves in, so stretched and leveraged were they before the crash, instead spending fortunes buying up plots of suddenly cheaper land for new developments. Restaurants are packed wherever you go, with sometimes queues outside waiting for tables. Stores are filled with shoppers. Certainly many of the coastal provinces are depressed (The Pearl River Delta is not a happy place at the moment) but other parts of China, particularly inland, are unaffected, even excited now because the stimulus package promises more business to come.
Now, we can all put on as many caveats as we like and talk of dead cats bouncing and W growth and the like – and who knows, more disasters may happen as the year progresses, the stimulus package may not work as effectively as the government hopes, we probably have not seen the worst – but what is visible, palpable and undeniable is the optimism and confidence in every city among ordinary people – and I don’t think any of those feelings are much to be found in abundance in cities in America and Europe and other parts of Asia. In that respect China is unique. And that is only encouraging.
hi great topic we have going there!