After trading up four days in a row, with the SSE Composite closing on Monday at 2091, up 3.6% for the day, the market turned today and the SSE Composite lost 2.5% to close at 2038, less than one point off its intra-day bottom. What drove the four good days was continued talk of government intervention to support the market by buying shares.
What probably caused it to decline today was surprising comments made earlier by Fan Gang, an advisor to the PBoC, about a potential decline in exports in November. Actually the comments were not completely a surprise. Last Wednesday I mentioned in my blog entry that there were rumors swirling around the market that year-on-year exports for November had actually contracted by 7%. I was not able to get any confirmation, but it should not be a total surprise if that happened since Korean exports contracted year-on-year in November by 18%, and Taiwanese exports also contracted, by 23% (both were hugely up as recently as August). Here is what Bloomberg said in its article today on Fan Gang’s comments:
China’s exports shrank last month and industrial-production growth cooled, Fan Gang, an adviser to the People’s Bank of China, said today. “Things are not so good,” Fan said at a forum in Beijing. “November figures will come out soon, and industrial growth will be something around 5 percent and export growth will be negative.”
A collapse from October’s 19.2 percent export growth would add pressure on policy makers meeting in Beijing this week to do more to sustain the expansion of the world’s fourth-biggest economy. The government has already unveiled a 4 trillion yuan ($582 billion) stimulus package and cut interest rates by the most in 11 years as a global recession cuts demand for the nation’s toys, textiles and electronics.
To give a sense of how shocking an actual contraction in exports would be, two hours ago I met with a group of very knowledgeable China-research economists. I told them about the rumors of a contraction and asked for their opinion, and they said that although they definitely expected export growth to continue slowing, they would be really surprised and worried if it actually were negative. A contraction in exports year on year will suggest that the impact of the global slowdown on China is happening far more quickly than anyone expected.
My simple global balance of payments model should suggest, however, that we should have expected a rapid slowdown. After all if Chinese overproduction is the flip side of US overconsumption, and each requires the other, then the astonishing rate at which consumption is contracting in the US should have, as its counterpart, an equally rapid contraction of production or, failing that, a rapid buildup of inventory. Either of these will come as a result of declining sales. There is no point trying to predict Chinese economic numbers independently from US economic numbers. The world imbalance has been built around US overconsumption and Chinese overproduction, and one cannot change with a corresponding change in the other.
Whatever the actual trade numbers turn out to be, I suspect they are a hot topic in the Central Economic Work Conference, which started yesterday. This conference is held every year to discuss what happened during the year and to set the economic strategy for the coming year. Here is Xinhua’s take:
China’s annual Central Economic Work Conference opened here Monday to set tone for the economic development next year. Observers believed the three-day event would give priority to efforts to maintain stable economic growth.
They reckoned in 2009, China would see more risks for worse economic slowdown, more struggling smaller businesses, grim export situation and arduous task of transformation of economic growth pattern. “It is imperative for China to maintain an economic growth of at least 8 percent,” said Zhuang Jian, senior economist with Asian Development Bank’s China Resident Mission.
It was hard for China to bear the consequences of a too slow GDP growth, Zhuang added, citing bankruptcy of numerous enterprises, more migrant workers being laid off and difficulties for college graduates to find jobs.
Later in the article there is a discussion of some of the relevant issues facing the participants at the conference:
China has launched a scheme to subsidize rural residents for buying home appliances since the end of 2007. It is estimated that in a period of four years, nearly 480 million units of refrigerators, washing machines, color TV sets and cell phones, which were in huge demand among farmers, will be sold in rural areas nationwide. That means 920 billion yuan to be spent by rural consumers. “There is still a large room for the government to mull more policies to boost consumption, such as raising the threshold for taxable income and increasing income for lower-income earners,’ said Cai Zhizhou, an economist with the prestigious Peking University.
Export has since long been a major driving force for the Chinese economy. Economists believed the stable development of smaller enterprises, particularly the exporters, which provided jobs for 75 percent of urban employees and rural migrant workers, was related to the stability of the enormous Chinese labor market. How to prevent export from sliding down too fast is one of the top concerns of the Chinese government.
“It is no doubt that China’s export situation will become more grim next year. However, if the country manages to maintain a moderately fast growth in foreign sales of machines and electronics, it will likely achieve a growth of more than 15 percent in export at large,” said Mei Xinyu, a trade expert with the Ministry of Commerce.
China has taken a string of measures to boost development of smaller enterprises. “It is necessary for the government to work out more detailed, effective methods to mitigate tax burdens and enhance credit support for smaller businesses, and to help them with their efforts to promote technical upgrading and explore more markets,” said Zhao Yumin, another economist with the Ministry of Commerce.
Basically, and not surprisingly, everything is on the table for discussion. The more sophisticated of the commentators, like Cai Zhizhou, are focusing on demand management as the key to resolving the problem. Unfortunately a lot of policy-makers also seem to be focusing on boosting exports, or at least maintaining their level. The trade expert with the Ministry of Commerce, for example, is talking about boosting exports by 15% next year. This is fine only as long as it comes along with a much more sizable boost in imports, but somehow I don’t think the Ministry of Commerce is very worried in boosting imports. But like it or not the trade surplus must come down sharply, or it will indicate that China is still counting on its ability to export overcapacity onto the rest of the world, where there is too much capacity and not enough demand.
On a separate note, one of the blogs I read regularly to impress people with my insider knowledge of Chinese policy-making (I just plagiarize him) is Victor Shih’s blog on Elite Chinese Politics and Political Economy. Here is a recent entry, which suggest to me that my long-running contention – that the government’s fiscal position is going to prove a lot less solid than everyone has always assumed – is not implausible:
More details have emerged about the 4 trillion stimulus package that China has rolled out. The main questions remain: who will get the money? How will it be spent? In a revealing article published the 21st Century Economic Herald (my favorite), reporter Wu Hongying gives a detailed account of how Chongqing (a provincial unit controlled by princeling Bo Xilai) plans to spend the money. I believe the situation faced by Chongqing is similar to that in many Chinese cities and provinces.
Basically, Chongqing SOEs, which focus on land holding, real estate, electricity, and financial services, are in deep trouble. Land prices in Chongqing have fallen by over 70%. The electricity group is in the red by about 250 million RMB. The debt asset ratio for the 8 major SOE groups in Chongqing has risen to 72%. No details are given about the financial holding companies, but considering that their main role is to inject capital in the other SOEs, they can’t be doing too well either. Things are not pretty, and the well off SOEs have to inject capital in the problematic ones.
So, the central government rolls out a 4 trillion stimulus package. As I pointed out in the last note, only a part of the money will be from the central government, but at this point, local governments are desperate to get this part. Thus, a massive fraud whose working and purpose are perfectly clear to all the players involved is perpetrated. Basically, local governments propose projects which may or may not be implemented with the sole purpose of receiving central funding and “supplementary” (peitao) bank loans from the state banks in order to stave off the bankruptcy of local SOE groups, which are heavily indebted at this point.
The local “self raised” part of the capital can be a piece of idle land or a redundant factory. The excuses are many, but both the local and the central governments know that the center and the banking system must give a large chunk of money in order to prevent (delay?) massive bankruptcies of local and a few central SOEs. As for Chongqing, it has applied for 20 billion in investment before the end of 2008 (out of the 100 billion announced by the NDRC for China as a whole). Almost all of the money will go toward large SOEs in Chongqing. Due to Bo’s political connections, Chongqing will probably get at least 5-10 billion, thus staying solvent for some time.