As Trade Slows, China Rethinks Its Growth Strategy
A recent article in the NY Times with excerpts below, talks about the continued deepening of China’s economic slowdown. When calculated in China’s own currency for a true local effect, the situation is worse than expected even a few short weeks ago. There is recession in the USA, recession in Japan, cancelled orders and lack of re-orders hitting the Chinese businesses dedicated to export markets.
The Chinese government’s plan is to stimulate the local economy and encourage its people to lower their savings rate. But with the lack of a health care plan or retirement programs, people seem to be saving more, not less. What is the best way for China to head off a recession? Should they establish a rudimentary health care plan for their citizens? Or is the money better spent in other areas?
As Trade Slows, China Rethinks Its Growth Strategy
In nearby Guangdong province, so many factories are shuttering without paying employees that some workers are resigning pre-emptively and demanding immediate pay before their employers go bankrupt.
In Sichuan and other interior provinces, municipal officials are desperately searching for ways to provide jobs for millions of out-of-work migrant laborers whose families no longer need them for farming.
Those are the effects of millions of Americans losing their confidence in the economy, feeling poorer and, as a result, pulling back on their spending. American retailers, after suffering a dismal holiday shopping season, are delaying payment for Chinese goods 90 or even 120 days after shipping, in contrast to the usual 30 to 45 days, forcing their suppliers to try to borrow more money to cover the difference. Some Chinese suppliers who cannot raise the money — many already operate on thin margins — are going out of business.
At the same time, retailers are demanding that exporters show that they have strong balance sheets and will not go bankrupt before completing orders. Exporters, worried the retailers will fail before paying for their purchases, are reluctant to let goods be loaded on ships. And banks, for the same reason, have cut back on guaranteeing retailers’ payments to exporters.
“Trade finance is collapsing,” said Victor K. Fung, the chairman of the Li & Fung Group, the giant supply chain management company that connects factories in China with retailers in the United States and Europe. “We’ve got orders we can’t ship right now.”
Mr. Fung estimates that 10,000 of the 60,000 factories in China owned by Hong Kong interests have closed or will close in the coming months. Other business leaders say the toll may be even higher and that factory closings are an even bigger problem among mainland Chinese businesses because these tend to be smaller and more poorly capitalized than those owned by Hong Kong businesses.
Government statistics show that Chinese exports slipped 2.2 percent in November when calculated in dollars, after seven years of rapid growth. But figures in dollars do not come to close to capturing the real depth of the downturn.
Convert the export figures into China’s own currency, a much better measure of the effect on China’s economy, and exports plunged 9.6 percent last month. Factor in inflation over the last year and the plunge was 11.4 percent.
Indications are that the December data will be even worse.
Consumer electronics manufacturers have been hit the hardest, according to customs data. “No one has any money any more, so demand for our mini hi-fi systems has declined a lot,” said Lion Yuan, the sales manager at the Shenzhen Yidashi Electronics Company, where exports have dropped 30 percent in the last year.
In the last two weeks, Chinese officials have announced a series of measures to help exporters. State banks are being directed to lend more to them, particularly to small and medium-size exporters. Government research funds are being set up. The head of the government of Hong Kong, Donald Tsang, plans to seek legislative approval by late January for the government to guarantee banks’ issuance of $12.9 billion worth of letters of credit for exports.
Particularly noteworthy have been the Chinese government’s steps to help labor-intensive sectors like garment production, one of the industries China has been trying to move away from in an effort to climb the ladder of economic development with more skilled work that pays higher wages. But now China has become reluctant to yield the bottom rungs of the ladder to countries with even lower wages, like Vietnam, Indonesia and Bangladesh.
China has been restoring export tax rebates for its textile sector, for instance, which it had been phasing out. Municipal governments have also stopped raising the minimum wage, which doubled over the last two years in some cities, peaking at $146 a month in Shenzhen.
“China will resort to tariff and trade policies to facilitate export of labor-intensive and core technology-supported industries,” Li Yizhong, the minister of industry and information technology, said at a conference on Dec. 19.
But shifting toward a greater reliance on domestic demand is not easy. Chinese households have one of the world’s highest savings rates because the country’s social safety net is in tatters, with families receiving scant government help with education costs, medical care and retirement; the average hospital stay costs the equivalent of two years’ wages for the average Chinese worker.
Important bureaucratic obstacles also exist. Chinese factories are allowed to import equipment while paying little or no duty, provided that the equipment will be used only to produce goods for export. Obtaining approval to switch the same equipment to making goods for the domestic market can take two years and require the payment of much of the import duties that were previously avoided, a payment that many factories cannot afford.
China’s measures to help exporters are starting to cause concern in other Asian countries that compete with it, and raise the risk of a protectionist reaction against China. Indonesia, one of Asia’s largest markets, is preparing to impose a series of administrative measures on Thursday that are meant to reduce smuggling but will have the practical effect of making it harder to import Chinese goods.
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