Montrose Journal: Summer 09
China on the Rebound: The Tiger Strikes Back
The year 2008 was one of wonders and calamities for China, from the success of the Olympics to the disasters of snow and earthquake to renewed trouble in Tibet. Even as it celebrated the 30th anniversary of its open door policy, China saw its overall trade cut by nearly 30%, unemployment rising up into the tens of millions, and speculation that GDP growth would fall below 6%. First quarter GDP growth figures in 2009 seemed to justify that bleak prognosis: they were down 6.1% ompared to 10.9% last year.
Certainly China has not been immune to the world’s financial collapse and shows similar shocking declines to those elsewhere. GDP growth, for example, declined last year to 9% overall from nearly 13% in 2007; foreign trade was the most severely affected with annual figures falling to 17.8% growth from the average 23% growth of recent years. During the first five months of 2009 overall trade continued to shrink by 23.7%.
We should not underestimate the devastating effect of this on coastal provinces, hubs for manufacturing export. Given the relatively large proportion these provinces have of China’s GDP growth (Guangdong, Shandong, Jiangsu and Zhejiang between them account for 40%), it is immediately clear how decline in foreign trade affected the overall economy. The Academy of Social Sciences recorded a closure of 670,000 businesses across China with 20 million migrant workers being put out of work. Official registered rban unemployment was 4.2% at the end of 2008. Including the loss of migrant jobs, the real unemployment figure could be as high as 9.4%.
The worst hit province has been Guangdong, which on its own accounts for nearly 12% of total national growth. Its GDP year-on-year has fallen to 5.5%, lower than the national average. Like any export-oriented region, it cannot expect to achieve its target until Western economies recover – and that is unlikely for years to come. Just as imports and exports have been falling, so has foreign direct investment; by January dropping more than 30%: for China a double whammy on both sides of the external equation.
There are internal challenges too. At the beginning of 2008 China’s leaders were mostly worried about inflation and rising prices. They brought in measures to combat these by adjusting interest rates with dramatic effects. Over the year inflation came down fast, both in terms of Consumer Price Index (CPI) and Producer Price Index (PPI), but the government was roundly criticised for restricting credit too severely, thereby creating a domestic slowdown that was too sudden.
When the world meltdown occurred last October the Chinese government was quick to reverse interest rates, but by then the deflationary process could not be stopped. The start of 2009 saw retail sales fall off, and the spectre of recession. This had little to do with the global crisis; it was an own goal of their own.
Among other things it broke the real estate bubble 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 2008. Some put the loss in real estate value at nearly 4 trillion RMB, equivalent to the whole of Wen Jiabao’s stimulus package.
The disasters besetting 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 continues.
Naturally all the gloom and uncertainty has caused a frisson of anxiety across a generation of Chinese who have grown up assuming that economic prosperity was guaranteed. The job market for college-educated Chinese, even those with degrees from top universities, has tightened. China has 6.1 million students due to graduate this year, and another one million from last year are still looking for jobs.
About 20 million of China’s migrant workers have returned home. That’s about 15.3% of the 130 million migrant workers in the country. This will have a big impact on farmers, since about 40% of their income actually comes from money sent home by these migrant workers.
So by any account China is facing severe and unprecedented problems and one would have thought it would be entering the same state of despair as anywhere else on the planet. By contrast with the gloomy West, however, China has overcome the shock of 2008; strangely everybody seems optimistic.
Why? First, there is strong, confident leadership from the top. There has been none of the hysterical panic that we have seen in some Western Governments. In Hong Kong one week last November the stock markets were crashing and the mood of despair that had overtaken the wider world was tangible. That same week Prime Minister Wen Jiabao was in Moscow, dealing with Putin on the one hand and Europe on the other. But he found the time to oversee a cut in interest rates back home and send off a ten point plan to assist Hong Kong. At Davos, he castigated the Western powers for irresponsibility in not better regulating the global financial system. During the same trip he travelled to Great Britain and gave a speech at Cambridge University.
The press focused on the student who threw a shoe at him – but the content of his speech was much more interesting. It was the first time that I have heard a Chinese leader describe China as a great power. Usually China’s leaders refer to it as a developing nation. 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 world from a new position of moral authority, playing a decisive role in the G20 summit and being unreservedly accepted at the top table that had been denied it before. Just recently China suggested a 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 wrought, there has been a strong shift in international power. The latest catchword in foreign affairs discussions is G2 (although China to its pragmatic credit disavows any such ambition.)
China has been putting its financial muscle into action. A recent buying delegation to Europe signed contracts of $13bn which Trade Minister Chen Deming said 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. The proposed $19bn deal between Chinalco and Rio Tinto might not have come off. But as with the failed attempt in the US by Sinopec to buy Unocal, this will not stop Chinese companies pursuing further such opportunities. China National Petroleum Corp (CNPC) has recently signed a deal with the Iraqi government for a US $3 billion project. Sinopec has just bought Addax Petroleum of Canada.
The falling prices of commodities worldwide have given China the opportunity to buy strategic resources. Bulk carriers in the first months of the year had a bonanza shipping vast quantities of metals and minerals to China’s ports. Oil tankers followed in their wake and, as China takes advantage of the low oil price, storage facilities are expanding in Dalian and other ports. This is not the behaviour of a country rattled by the global crisis, but the well calculated policy of a country playing on its strengths rather than its weaknesses.
Although the economic statistics look dire, there are several factors that indicate China is uniquely capable of dealing with the crisis. First, its financial management during the decades of growth has left the country with a strong exchequer. While other nations have accumulated large public sector deficits, China had grown its foreign exchange reserves to $1.95 trillion by the end of 2008, and is not saddled by national debt.
China’s banking reforms after the Asian Crisis of 1998 have 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. That is true of most of China’s other banks. While the rest of the world suffers a liquidity problem, China’s banks are in a position to fuel economic growth and will play their part in the government’s stimulus measures – the state-owned banks will provide financing for the 4 trillion RMB stimulus package announced by Wen Jiabao. The Government will fund only 30 per cent of the plan itself. And I am among those that believe it will succeed.
The stimulus package is already showing signs of effect in inland provinces, but this is not yet being translated into increased consumption. Here, money being planned for health and education is critical. China’s conservative population are the highest savers in the world (savings now stand at 50%). In the absence of any welfare programmes, it is part of the national psyche 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 will release such anxiety and allow savings to flow into the economy. Similarly, those saving for education will spend more on other things if education can be made free or subsidized, 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 spirals of mortgage or borrowing here.)
Affordable housing is important. Most of the decline in housing prices 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 the Party. The one advantage of a totalitarian state is that it can get things done quickly (as during the Sichuan earthquake last year). We now see a government and state mobilising all its resources towards stimulating growth. There is nothing quite like this dynamic anywhere else in the world.
In his work report before the National People’s Congress in March, Wen Jiabao announced how he expected the stimulus plan to work. The world’s press, used by now to governments following one ambitious and panicked rescue plan with another, fully expected a new stimulus package to follow on the heels of the last one. Instead, Wen told journalists 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 — but let’s see first the results of the first quarter and the effectiveness of what we are doing already.“
What startled everybody was his firm announcement that China’s GDP for 2009 will grow by 8% — this after most foreign financial institutions and even the World Bank doubted growth much above 6% (although the World Bank has recently raised their estimate to 7.2%) He admitted it would be difficult but said it was achievable. There would be more money for earthquake recovery and support for small and medium size enterprises, science and technology and employment plans. He announced that this year the government will spend 293 billion RMB on this alone — 17.6% up from last year, including the establishment of a universal health care system.
Despite all the depressing financial statistics, most Chinese, and many long term foreign residents in China, seem to share the Prime Minister’s optimism. The catching of breath arising from the visible downturn in November and December was replaced in time for the Chinese New Year by a more optimistic view that China’s tsunami had passed.
Stories abound of big real estate companies, which by rights should be reining themselves in, instead spending fortunes buying up plots of suddenly cheaper land for new developments. Restaurants are packed wherever you go, stores are filled with shoppers. Certainly many of the coastal provinces are depressed but other parts of China, particularly inland, are unaffected, even excited now because the stimulus package promises more business to come.
We can all place as many caveats as we like, and talk of the dead cat bounce – and who knows, more disasters may happen as the year progresses,’ but what is visible, palpable and undeniable is optimism and confidence in every city among ordinary people. I do not imagine those feelings are abundant in America and Europe and other parts of Asia. In that respect, if in no other, China is unique.
The prognosis remains good for investors. There are no clouds on the political horizon – the twentieth anniversary of Tiananmen passed without incident (not too surprisingly since most of the protesting students of that era are now businessmen and students today are more inspired by national pride than desire for reform). The housing market has more than recovered in the big cities. Domestic trade is booming. For the man in (most) streets, it is business as usual.
Adam Williams is a Beijing-based businessman, representing the services conglomerate, Jardine Matheson. He is also an author of novels about China (they include The Palace of Heavenly Pleasure, The Emperor's Bones and most recently The Dragon's Tail).