The Crisis and China

Dec 30, 2008 Editorial

Ever since the financial meltdown began to unfold in the US and Europe, there has been intense debate in political and financial circles about its possible impact on China. China, after all, has become the workshop of the world in general, and any adverse effect on its colossal manufacturing base would be sure to have ripple effects in every other economy out there.
The consistent double-digit growth rate that China has achieved over the past two decades has been unprecedented in the modern world – unmatched even by the Japanese miracle of the sixties and the seventies. Most of it was sustained by exports of manufactured goods: by the end of 2007 almost half of China’s GDP growth was attributed to exports and government consumption, a dramatic reversal from 2003 when growth was dominated by investment and private consumption.
To maintain that growth in manufacturing, raw materials from across the globe were secured and gobbled up at an astounding pace. This demand has pushed up the prices for a wide range of commodities, and therefore any faltering of the Chinese miracle will inevitably witness a concomitant drop in demand and a fall in prices.
Almost all of Guyana’s bauxite, for instance, ends up in China – not only because Bosai is a Chinese company, but because that country is the chief customer of our other bauxite mining operation, Rusal. Notwithstanding Bosai’s assurances to President Jagdeo, we do not see how the price of our metal grade bauxite will be unaffected by a downturn in the Chinese economy.
So the question arises as to whether the Chinese economy can be buffered from the effects of the recession that is now conceded to be working through the US and European economies? From a purely theoretical standpoint there is no way that the shrinking of its largest and most valuable market – the US – can leave China unaffected.
China is like the US in 1930, with massive excess production, and the US is like Europe, its main customer that could suddenly not pay for its profligacy. This is a structural problem, and matters will never return to the situation as before: the US will most likely attempt to rebuild some of its lost manufacturing base while slowly conceding that it cannot continue to live on credit.
In real terms, thousands of factories in China have already been closed and workers sent home to await an uncertain future, as exports have fallen. In Guangdong Province alone, the heart of China’s low-cost manufacturing base, half of the shoe-manufacturing industry (over 2,200 factories) has closed this year. The IMF has projected that the growth rate next year for the Chinese economy will be about five per cent – which may be decent for most economies but will be catastrophic for China – since an eight per cent rate is necessary to keep the employment rate stable.
The Chinese authorities have conceded the argument and have responded by announcing a 4 trillion yuan fiscal stimulus package that it hopes will increase domestic consumption to pick up the excess production. But this is easier said than done.
The $64 million dollar question is: “Where is this demand going to come from?” The Chinese are great savers and have very little debt, and these qualities are not going to be turned on their heads just because the government lowers interest rates and increases spending. Conservative people are not going to suddenly become the last of the big-time spenders in the midst of massive lay-offs that are now very apparent to everyone as redundant workers are trickling back to the villages.
For the newly created middle class, they have seen their residential property market implode as has the stock market. The Shanghai index lost two-thirds of its value since its peak in mid-October 2007, and the Hang Seng is down over 50 per cent from its peak a year ago. This too must work against the psychology of increased domestic spending as the wealth effects here are significant.
The bottom line in our estimation is that, just as with the US, China is in for a period of fundamental structural change – and not just economic – to deal with the new realities of the global order. We in Guyana should cut our cloth accordingly.

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