Mar 05

On the State of China’s Economy and the Global Economy

Written by Allen on Thursday, March 5th, 2009 at 2:42 am
Filed under:Analysis, General, News | Tags:, , ,
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As the current world economy crisis drags on, there are still lingering hopes that China just might remain a bright spot in the world economy and help lead the world back to recovery.

According to a Reuter’s report today,

World stocks bounced back from multiyear lows on Wednesday, buoyed by signs of economic recovery in China and plans by its government to increase fiscal spending, news that helped lift oil and metals prices.

A key gauge of Chinese manufacturing rose in February for the third straight month, hitting a five-month high and lifting investor optimism on hopes the data signaled that China, a major driver of global growth, may be on the brink of economic recovery. China also said it will boost spending on infrastructure and manufacturing under a second stimulus package.

“The market is encouraged by the news from China,” said Joe Arsenio, president of Arsenio Capital Management in Larkspur, California. “They believe (China) will gain traction in the second quarter.”

The rise in equity markets around the world overshadowed more dire economic data suggesting that the U.S. and euro zone recessions have yet to hit bottom.

U.S. private companies hemorrhaged 697,000 jobs in February and the service sector slump deepened. The dollar vaulted to a four-month high against the yen as another slide in the U.S. private-employer payrolls and persistent worries about the world economy boosted safe-haven flows into the U.S. currency.

Asian stocks rallied on Wednesday on hopes Beijing will step up efforts to support the Chinese economy … Japan’s Nikkei share average .N225 rose 0.9 percent, after sliding to a 25-year low on Tuesday. The MSCI index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 1.3 percent.

But while there are hopes, there is also no doubt that the current global recession has hit China hard. In this Washingtonpost article, it is reported that despair is mounting among migrant workers (it looks like an excellent article, so I’m quoting it in full):

Li Jiang was hungry. Huddled in the freezing rain with more than 1,000 other people at 6 a.m., he stood patiently in line hoping he had come early enough to get some of the free rice porridge steaming in giant cauldrons nearby.

It was an unfamiliar feeling for Li. For the past 11 years, he had been making a comfortable living on a steady stream of construction and factory jobs that afforded him fancy cellphones and other modern luxuries. But he was laid off two months ago, and it has been impossible to find work since.

“This is an unfair society,” said Li, 27. “The government isn’t giving much help, and there are too many bosses who are out to cheat us.” It is the first time in his life, he said, that he has felt such deprivation.

Six months into what economists and labor experts say is China’s worst job crisis since it began market reforms 30 years ago, many among the most vulnerable — an estimated 20 million workers who lost their jobs after migrating from the countryside to cities — are becoming desperate.

As tens of thousands of manufacturing companies have collapsed amid slowing demand due to the global economic crisis, the laid-off workers can no longer find jobs in the cities. For many, returning to their rural roots is not a possibility because their families’ farmland has been sold off to make room for shopping malls, office high-rises and apartment complexes — leaving them with no safety net. Even those lucky enough to have kept their farming plots have been hit hard by a drought — the country’s worst in 50 years, according to the government — which has affected up to 80 percent of the land for winter crops.

“The drought has had a big impact on farmers. Some villages are out of food,” said Lu Xuejing, a professor at the Capital University of Economics and Business in Beijing. The impact has been especially pronounced in the nation’s northwest, in provinces such as Gansu, where high temperatures combined with sparse rainfall have dried up riverbeds and killed wheat crops. This convergence of factors has meant the unthinkable for a country that in recent years has enjoyed double-digit growth in gross domestic product: As many as 10 percent of China’s 130 million migrant workers face what Renmin University professor Yao Yuqun calls “bread-and-butter issues.” They are having trouble putting food on the table because “they no longer have farmland, and they lost their jobs in the cities,” Yao said.

Food lines like the one in Yiwu recall the worst period in modern Chinese economic history — the 1958-61 famine that resulted from the Great Leap Forward, when, as part of a plan to transform a largely agrarian society into an industrialized one, millions abandoned their farms to work in factories, leading to food shortages.

China is not in any danger of that happening again. Since then, the country has kept generous reserves of grains, pork and other staples, and it has an estimated $2 trillion in foreign exchange reserves that it can use to buy the food it needs from elsewhere.

The challenge for China’s leaders is to ensure that no one goes hungry, without moving the country back to the iron-rice-bowl era, when the state guaranteed cradle-to-grave employment.

The central government has responded to the sharp economic contraction by focusing on job creation and vocational training rather than handouts with its $586 billion stimulus package. Some city and provincial governments have taken a different approach, handing out food coupons for the first time. They have also distributed vegetable oil and other essentials, but these programs are limited.

Meanwhile, China’s social welfare system is a work in progress and will be one of the main items on the agenda this week at the annual meeting of the National People’s Congress in Beijing. A proposal to create a universal safety net that includes unemployment insurance for all citizens was released for public comment in December, but it is yet to be implemented.

Wealthier citizens are trying to fill the gap between what the government is offering and the need they see in their neighborhoods, by starting soup kitchens and other charitable endeavors like the one in Yiwu.

As it has gradually opened up its economy, China has periodically struggled with high unemployment. The most recent crisis before this one was in the late 1980s to mid-1990s, when many of the country’s state-owned enterprises were privatized. But that shift affected only one segment of the population. “There was almost no problem with migrant workers and fresh graduates from college. However, now the unemployment problem is nationwide,” said Chen Bulei, a labor law researcher at Renmin University in Beijing. Chen said that the unemployment issue today “is not only a simple economic problem,” but also a social one. This has been evident in the protests that unemployed workers have staged in recent months.

“It’s like migrant workers are crossing a river to reach the bank. Right now they are just in the middle of the river. The moving has not yet finished — can they obtain equal treatment as city citizens? If this cannot be solved effectively, migrant workers are a very unstable factor,” Chen said.

A year ago, Yiwu was a showcase for a booming China. The streets were filled with shiny new cars shuttling businessmen to meetings to sign multimillion-dollar manufacturing deals for products such as blankets, calculators and toys. Restaurants were doing brisk business in shark-fin soup and other delicacies. Hotels were overbooked.

These days, the mood in Yiwu is depressed.

Storefronts for exporters that have gone out of business are boarded up. Rows of sleeping migrant workers fill the sidewalks. On a recent weekday morning, people lined up for the rice porridge being given away by Lin Ruxin, who owns a local printing factory.

Lin, 50, said he opened the food station in early January when he began to notice that more and more people were gathering in front of the unemployment office and that many of them would stay there the whole day without eating. He organized a few volunteers and dipped into his savings to fund the breakfast service. They begin cooking at 10 p.m. and work all night until about 6 a.m., when they start giving away the food. Each serving also includes some pickled vegetables and two buns.

“I feel for them,” Lin said. “When I was a child, I went through the Cultural Revolution, and when I started my own business, I also had a hard time. Everywhere I went, I got knocked down. This is the situation the migrant workers are in now.”

Many of the people in the food line are down to their last 10 or 20 yuan, the equivalent of a few dollars, and have hawked all their worldly possessions. They eat crouched in corners or on the street as cars whiz by.

“To be honest, the porridge is tasteless and the buns have no nutrition, but when you have no money, everything tastes delicious as long as it can fill you up,” said Li, who does not even have enough money for the bus fare to get him back home to Guizhou, a province about 950 miles away, in China’s southwest.

Nearby are Wu Kailing, 40, his wife, Wen Shengju, 40, and their daughter, Wu Ying, 14. They had not been able to find any work in their home province of Sichuan and saw something on television about this city’s small commodities market. But they have not found work, and they have used up their life savings.

Wu said that his family has one-third of an acre of land at home and that that is not enough to feed his family, “so going home, we’d still go hungry.” His one hope is for a better life for his daughter. “I don’t care what she does in the future — I just hope she won’t be like us. I feel we are not treated fairly.”

When Lin started the food line two months ago, the 1,200 portions he was giving away each day would last about two hours. These days every bit is often gone in 45 minutes.

How is the economy treating everyone?

What are your outlooks for for China’s economy, the U.S. economy, the global economy?

Finally – on a side note: while there has been some rumors that China is cancelling airbus orders this year, the official news from Xinhua is that no cancellation has been issued.

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22 Responses to “On the State of China’s Economy and the Global Economy”

  1. TonyP4 Says:

    I just posted one in a similar topic in this blog.

    Economically, today (3-14-09) is a date for Chinese to remember.

    The higher hope of Chinese stimulus plan drives the Asian markets up and even the US market is up 3.5% (at one time and it gave back some at the end). 20 years ago, what it happened in China had no influence on the global economy. What a nice change! And we’re all proud of it.

    All the sectors in the world that would benefit from the Chinese plan rise such as steal, oil, commodities… Hope China leads the world to move us from the global recession. Hope in a hopeless world.

    As in another post, airbus orders have no meaning but a political tool for China. The orders just place a position in the queue.

    I believe economy comes first all the time. When the rich are richer, they have money to give to the poor and research. The government in turn has more money to spend due to more taxes when the economy is good. When everyone is working, no one needs to fight for food and topple the government with their anger. CCP understands all this and it tries very hard to make sure every one has a job – they even sell stuffs at a loss in order to have more citizens employed.

    The plan is good, but it will not solve all the problems right away. It is not a bailout plan as in US. It will take time to implement. There are many problems immediate and longer term.

  2. Stinky Says:

    Sadly, I don’t share TonyP4’s warm fuzzy – about either 3-14-09 (still more than a week away!) or much else in China these days. In fact, I expect hard times for years (decades?) to come. And if I had to choose a country to root for right now – our best hope to pull it and the rest of the world out of the economic mess that we’re in – I would choose the U.S. (and the EU). IMHO, China will be fortunate to emerge without significant political unrest and/or social decay. (Let me be clear – I am not hoping for either.)

    Anyone read the recent essay by Sun Liping (孙立平), the Tsinghua University sociology professor? He writes that the biggest threat to stability in China is societal decay, not political unrest. Xujun Eberlein has translated much of Prof. Sun’s essay over at her blog (Inside-Out China). The original (in Chinese) can be found at http://news.163.com/09/0228/09/537R7NFN00012Q9L.html. Of the thousands of Chinese who have bothered to leave comments, most express support for Prof. Sun’s argument.

    In keeping with the spirit of the second article from the Washington Post, I found the following at Silk Road International Blog about the apparently dire situation in Dongguang – the industrial/factory area just outside of Shenzhen:

    “As I was out at a factory in Dongguang today I saw lines of people looking for work outside most of the factories we drove past. This is just one that we happened to stop in front of in traffic long enough for me to snap a quick photo. I counted 25 people or more outside multiple factory gates. I haven’t seen this since 2005.

    Second, a security note. Two other people (who shall remain nameless), while in a different part of Dongguang today, saw a group of people on the side of the road hack another person to death (at least they think he died) with a machete. They kept on driving, sped up even, to get out of there as quickly as possible.

    If you have money or are alone I would highly recommend that you DO NOT go out at night in any of the industrial areas outside of Shenzhen. This would include Songgang, Dongguang, Longgang, Bao’an, Guanlan, Shiyan, Huizhou and other areas with tons of (unemployed) migrant workers and not a lot of policing or economic development.

    I’ve seen fights, I’ve seen people get robbed and beaten, I’ve seen a woman and child get run over by large dump trucks, I’ve even seen a dead body on the street (at least I think it was dead), I’ve had family tell me about kidnappings they’ve seen, I’ve had family robbed at knife point and I’ve been pick-pocketed numerous times myself. I’ve had clients tell me about huge gang fights they’ve see while making side excursions in shopping malls! I even chased down and dragged to the police station two guys who tried to steal my bike once. But I’ve never seen anything like this before.

    You need to make sure that being here is really worth it for you. And if you are staying here, you need to take the security threat seriously. The risk is increased with more and more unemployed people loitering around.”

    Scary ****, no? Read for yourself at http://silkroadintl.net/blog/2009/03/03/qc-blog/.

  3. vmoore55 Says:

    Recently I have been to a few places like that, what I saw was hell on earth.

    There were father muggers beating and robbing poor working men on the streets everywhere, some men were knifed in the head and killed for their cellphones and Ipods.

    Just down the road we saw a bunch of mother rapers taking turns raping a women as her two kids stood by crying for help, but nobody cares.

    Three kids got kidnapped outside the same school and a father in a car was shot dead in the head, he didn’t have the money we heard later.

    In the news, a report came on the TV that said 5 foreigners were carjacked and kidnapped for ransom and 15 bodies were found in a pit outside a factory, 2 women and 3 kids were ran over by a stolen car.

    They tell me this nothing new in Brazil, it has been going on like this for over 30 years.

    So, why is this kind of societal decay a threat to stability only apply to China and not to other countries like the US, Mexico, Canada, India, Taiwan and many more?

    Maybe Sun wants China to go back to it’s roots.

  4. Raj Says:

    So, why is this kind of societal decay a threat to stability only apply to China and not to other countries like the US, Mexico, Canada, India, Taiwan and many more?

    I note that you’ve only listed democracies, though Mexico has had some very turbulent episodes in its past (India too). Democracies (that means they actually ARE democratic, not just having show elections) have an automatic benefit that people can express their dissatisfaction through elections. That doesn’t mean unrest won’t occur, just that it’s unlikely to pose a threat to the government.

    Even the Chinese government has admitted to a significant level of unrest even during the super-boom years, when there was no corresponding trouble in North America and even Taiwan when things were good. I don’t see why those other countries would suddenly overtake China in terms of social unrest.

  5. TonyP4 Says:

    Sorry it should be ‘3-4-09’, the day the world market celebrated on the hope of Chinese stimulus plan. As I said before, it is just hope in a hopeless world – we need to be more optimistic.

    I would choose US to root for now. It is still rich by many standards (e.g. US’s GNP is 2 1/2 times of China). Once the US fixes the problems, we would be back to normal. However, this is not a selected part of the economy and not a few countries. It is almost all sectors and all the world. It will take longer time and most experts expect to start recovery at the end of this year.

    Would it be the big depression or the Japan’s lost decade of no growth. It is possible, but not likely. We have many systems/laws to prevent another great depression. US is no Japan that does not have a lot of natural resources/farm land per capita and Japanese government did not act fast enough than US.

    Dongguang is quite similar to Kun Tong in Hong Kong. It became a ghost town when all the manufacturing moved to China. People adept fast. Hong Kong folks seldom remember it now.

    Without reading Sun’s article and many similar articles, there are many articles about better future. The richer society brings social decade. Folks are more selfish and need to protect their wealth. It is different from the time when everyone was poor. I hope the rape case is only isolated. US is richer and folks are afford to be nice and civilized. However, we do have cheats to cheat 50 billion.

    It is a story of half empty or half full. I’m in the middle path always and I expect US will recover early next year and it will have good many years to come after learning how the economy was damaged.

    There will be unrest by unemployed workers… CCP seems to be the expert in suppressing riots and control them before they get out of control – a lesson from Tienanmen Square. The rich foreign reserve in China would be a important factor to lead to a stable China. Easily they can double the 580 or so billion in the stimulation plan.

    When the economy is good, folks fight for their share of riches and social injustice of the corruption (the connection between the rich and the one with power).

    The ‘hard time in China’ is all relative. Do we think China next year will be worse than China 30 years ago? Not me.

    My ideas are usually politically incorrect and some could be arguable. At least you do not blame me for following the herb.

  6. rocksteady Says:

    Raj hit it on the head–allowing your country’s citizens to have a say in what governs them is key to diffusing societal unrest. Which is why democratic nations (well-established ones, not newly spawned or faux democracies) have an edge in quelling the masses.

    But as an interesting note, China has also taken steps to generate this kind of system, and apart from the horrific failure that was the Hundred Flowers Movement, the more modern approaches are a nice step forward. Having localized elections to select village leaders, making local level governmental books available for public viewing, these are all good efforts towards minimizing societal unrest. Of course they have a very long way to go in the sense of refining these processes, and making them universal, but nonetheless it’s a refreshing concept.

    Another thought is that the US and other developed countries have functioning and well-defined justice systems. The most important part of the US justice system is the existence of the Appellate court. People can seek justice for themselves, and don’t need to rely on others. China’s appeals system exists, but is cumbersome and unwieldy.

  7. colin Says:

    @4 & 6

    “So, why is this kind of societal decay a threat to stability only apply to China and not to other countries like the US, Mexico, Canada, India, Taiwan and many more?”

    “I note that you’ve only listed democracies”

    Democracy my ass. India and Mexico are just as restless. India even more so. Why is US, Canada, Taiwan, Japan, Western EU, Saudi Arabia, UAE, etc. stable? Cause they’re freaking rich.

    Some people here write these long winded comments as if they actually knew anything. These guys inevitably harp the pros of democracy vis-a-vis how backward china is in this regard. It’s all bull.

  8. colin Says:

    I doubt however that China will lead the globe out of the recession. For that to happen, china would have become the de-facto next superpower, and that’s not happening any time soon.

  9. colin Says:

    As for airbus orders, it makes perfect sense that they are cancelled. World is in recession so travel needs are down. Tons of unemployed and underemployed in china. Put the engineers and workers to work developing the home grown aircraft industry.

  10. FOARP Says:

    China’s growth is still powered by a very simple and relatively fail-safe phenomenon:

    1) Factory is built.

    2) Workers leave farm, go to factory.

    3) Factory makes more money than farmers would selling to home/abroad.

    4) Money made is used to build factory.

    Slow down in the world economy will affect sales, but China is in the throws of an industrial revolution similar to those of the 19th century, and government is firmly behind it.

  11. yo Says:

    “Which is why democratic nations (well-established ones, not newly spawned or faux democracies) have an edge in quelling the masses”

    I agree with where colin is going with this, what you say is no trivial qualification, almost like saying democracy works…well..just the goods ones…

  12. yo Says:

    I’m a little bit skeptical that China can pull out of the downward decline before the world does. However, perhaps there might be the productivity element that everyone is overlooking that is propelling their GDP upwards besides the more visible capital expenditures that China is pumping into their country. Also, I’m interested to see how china handles the near 20 million unemployed migrant workers.

  13. huaren Says:

    @yo, #12

    Great point about productivity.

    Regarding the 20 million – I think if the very same 20 million remains unemployed for extended periods of time, then its a problem. But, if you have different 20 million in aggregate that is in transition from unemployed to then employment, then that’s not much of an issue. China has a lot of reserve, and if this 20 million swells, then pump more in to infrastructure spending. So I think it is not a hard problem like inflation was.

    @FOARP, #10
    “Slow down in the world economy will affect sales, but China is in the throws of an industrial revolution similar to those of the 19th century, and government is firmly behind it.”

    You got that one right.

    Many baffoons were forecasting China’s collapse around 2006 when inflation was starting to become a problem. These baffoons need to look at China more from the perspective that China is going through an industrial revolution.

    Great points.

    Chinese is not unique either though. When the Europeans were busy building factories making knock-off silk and procelain, Chinese people thought Europeans were uncivilized and barbaric. If there was blog and media like today to amplify those arrogance, I know how the Europeans would feel.

    Lots of baffoons out there today talking crap about China nowadays.

    I guess buffoons existed in time – they know no physical or time boundaries. Annoying as heck though!

  14. Raj Says:

    China’s shares were apparently down today because of a Wall Street down-turn. But they’re up across the week.

    I don’t think China can pull the world out the hole because imports and exports are down – it’s just too much to ask. We have to work together rather than expect someone to bail us out. However, China may get off relatively lightly – at least compared to the US and UK!

  15. colin Says:

    @Raj 14

    “China’s shares were apparently down today because of a Wall Street down-turn. But they’re up across the week.”

    What’s your point?

    “I don’t think China can pull the world out the hole because imports and exports are down – it’s just too much to ask.”

    Abe Lincoln knows exports are down from within his grave. Did you just find out about this fact or something? And what is “too much to ask”?

    “We have to work together rather than expect someone to bail us out.”

    Who is we? US, UK and China? If so, well… I thought the the United Federation of Planets was gonna bail Earth out. Or God. Or maybe Mexico.

    Raj, please focus on finishing your 4th grade education before coming back to comment.

  16. Shane9219 Says:

    Chinese Premier Wen Jiabao held a news conference on Friday


    “We have prepared contingency plans to handle greater difficulties. We have prepared enough ammunition and we can launch new economic stimulus policies at any time.”

    “The most direct, powerful and effective way to deal with the current financial crisis is to increase fiscal spending — the quicker the better.”

    He said the 1.18 trillion yuan to be invested by the central government, anchoring the 4 trillion yuan stimulus announced on November 9, is all new money, and 595 billion yuan of budget funds has already been allocated.

    Some road and rail projects had already been identified in the current five-year plan but would now be speeded up.

    “Otherwise, how can we start so many infrastructure projects within such a short period of time? All these projects have been assessed and details of all will be made public.”


    “I believe that there is indeed some difficulty in reaching this goal. But with effort it is possible.

    “Firstly, we should consider its merit and possibility; secondly, it is a promise and commitment by the government; and thirdly, it shows our confidence and hope.

    “If you look at the countryside, no matter how much investment goes there, it won’t be enough.”


    “Confidence is more important than gold or money.”

    “First and foremost, we need very strong confidence. Only when we have confidence can we have courage and strength, and only when we have courage and strength can we overcome difficulties.”

    “In implementing this plan, the priority task remains to bolster confidence.

    “After months of efforts, the hearts of Chinese people have started to warm up. I hope every Chinese will warm up the economy with his or her warm heart.”


    “Our fiscal deficit is still manageable, and the level of debt is still in the safety zone.

    “Given China’s economic development and growth in tax revenues, we now have more leeway to run a larger fiscal deficit and take on more debt.”


    “After a decade of reform, China’s finance (system) is basically healthy and stable. This is providing strong and vigorous support for economic development.


  17. Steve Says:

    @ Shane #16: Shane, I’ve noticed that China’s goal every year is between 7.5 and 8.5% growth rate. I did some checking and it seems that 8% is the magic number where the new workers can be absorbed into the job market without increased unemployment but anything much higher will generate inflation and an overheated economy. In the midst of the world economic downturn, do you personally feel China can deliver on such a high growth rate in the coming year?

    To meet this figure, not only would millions of new jobs need to be created but the 20 million laid off migrant workers would also need to find new work. That’s a pretty tall order to fill. The stimulus package is a great start but I don’t know if it’s enough to get anywhere near those numbers.

    A friend of ours here in San Diego is a long time Civil Engineering professor at UCSD and lately has done a lot of consultant work in China (he’s Chinese American). We’ve always gotten along really well and we both have technical backgrounds so when we get together, we’ll usually talk “shop”. I ran into him at a Spring Festival party and found out he had just returned from China where he was involved with planning the new expenditures for civil works. He told me the package is not exaggerated and should help a lot. The reason I mention it is that many times these announcements are more show than dough, and later we find the true package is much smaller than anticipated. But China is stepping up to the plate so we can estimate extensive hirings on the construction side. That’s good news and I just wanted to confirm it to everyone.

  18. shane9219 Says:

    Cramer on China

    or “G1?: China’s Latest Sign of Economic Might”

    Watching Cramer on TV is usually the last thing for me. It is pretty hard to get a thumb-up from him. However, you got love to see the way Cramer jumping into China’s boat this time.


  19. Wally Shreck Says:

    Great blog! Sorry to change the subject, but, I’m new to Nashville and I’m looking for a great Nashville auto repair company,so I can get my oil changed. Have you read any recent buzz? There’s a new auto repair shop called Veterans Auto Services, but I’ve only seen a few reviews. Here’s the address of this new Nashville Auto Repair, Veterans Auto Services 2404 Cruzen St Nashville, TN 37211 (615) 712-9777. Let me know your thoughts! Thanks!


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