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China busy with damage control

By Xin Zhimin (China Daily)
Updated: 2008-10-27 09:32

A boy plays on a pile of toys outside a factory in Dongguan, Guangdong province, owned by Hong Kong-listed Smart Union Group. The toy factory has shut down amid the US financial meltdown, which has triggered a domino effect globally. [China Daily]

Two of Hong Kong-listed Smart Union Group's factories in Guangdong closed their doors on October 15, leading to the loss of more than 6,000 jobs. Six days later, the Ministry of Finance raised the export rebate for toy manufacturers.

These two incidents are a clear indication of China's economic scenario: Struggling manufacturers and exporters, the loss of a large number of jobs, slowing economic growth and a prompt response from the government.

And more than that, they send an unmistakable signal that the global financial crisis is no longer a financial disaster. It has evolved into a real economic catastrophe that has swept not only the United States and Europe, but also faraway corners of China.

With the global economy expected to remain in the doldrums for quite some time, the Chinese economy is likely to face one or two difficult years, economists say.

As Paul Krugman, this year's Nobel economics laureate, points out: "Even if the (US) rescue now in train succeeds in unfreezing credit markets, the real economy has immense downward momentum."

"Many problems in the United States, such as those concerning credit cards and non-financial corporate losses, are yet to surface," says Zhao Zhong, senior consultant with Beijing Adfaith Management Consulting. "It is too early to conclude that the worst time has come."

Most reputable forecasters currently foresee that the US economy will start picking up again around the middle of 2009, with a broadly similar pattern in Europe, according to Louis Kuijs, the World Bank's senior economist in China. "That does mean that, for the year as a whole, economic growth in the developed world is currently forecast to be very weak in 2009."

That sounds bad for Chinese policymakers, who have to issue a number of supportive policies to shore up an economy whose growth dropped to 9 percent in the third quarter from nearly 12 percent last year.

Just several months ago, those who urged the government to take more precautionary measures to combat potential overcapacity and an economic hard-landing were booed by optimists, who were still obsessed with the country's "two prevents" drive - prevent the economy from overheating and inflation from going wild.

Now, as the US financial turmoil unfolds and is biting into the real economy, few remain that optimistic. Worse, no one knows if the worst has already hit. Probably not, many say.

The Chinese economy has seen its pillars of growth - exports, retail sales and investment - all shake under the double whammy of the global economic slowdown and domestic tightening since last year. Despite impressive export growth in September, for example, many believe this momentum will not be sustained.

"So far China's export growth has held up well, remarkably well, given the slowdown in the world economy, underscoring China's strong competitiveness," says Kuijs. "However, we do think that a further slowdown is likely later this year and into 2009, given that the worst of the global financial turmoil, and its impact on the real economy in the rich countries and many emerging markets, is still unfolding."

Investment in China's export sector will also be affected by the international turmoil and weakness, he says, adding that "investment in the parts of China's economy catering to the domestic market should be affected less, and public investment is likely to be scaled up somewhat in response to the slowdown".

Standard Chartered Bank (China) in its latest report reduced its China GDP forecast for this year to 9.6 percent from 9.9 percent, with fourth quarter growth further dipping to 8.6 percent. For the next year, the growth estimate would be a poor 7.9 percent while it is even lower at 7.1 percent for 2010. "We are putting them on downgrade watch," said the report.

Ha Jiming, chief economist of China International Capital Corp, agrees. "The hard times will not last for months, but for years," he says. "Even 2009 will not be the bottom (for the Chinese economy)."

This gloomy outlook sounds an alarm for Chinese policymakers, who have seen the economy expand by an average 10.6 percent over the past five years and more than 9 percent on average for the past three decades.

Demographic evidence

Demographic statistics also point to economic weakening in 2008-2010, as the ups and downs in the number of different age groups affect demand for economic activities, says Dong Xian'an, a macroeconomic analyst with China Southwest Securities.

Generally, people start to work between the ages of 20 to 24 and those people are also a major driving force for consumption. From 2005 to 2008, for example, the number of China's young people increased rapidly, which contributed to the economic boom during that period, Dong says.

But between 2008 and 2010, demographic experts say that the number of workers aged 20-55, except those between 45 and 49, will drop dramatically. "It will adversely influence consumption and labor supply," Dong says. As consumption weakens, the most affected areas are real estate and autos.

Meanwhile, the population aged over 55, most of whom rely on social security and do not work, will increase rapidly.

All these statistics are bad news in terms of China's domestic demand and the overall economy, Dong says.

Silver lining

"After three decades of great economic success, the Chinese economy is facing a major hurdle," says Tang Min, deputy secretary-general of the China Development Research Foundation. "But it could also be a good opportunity (for China to sharpen its competitiveness)," he told the Chinese Economists 50 Forum last week, which brought together top policymakers and economists to discuss solutions to the current economic woes.

"The financial crisis will definitely have some impact on the Chinese economy," says Liu He, deputy director of the Office of the Central Financial Work Leading Group. "But China is a very big country, which offers it much room to adapt to reduced foreign demand."

Moreover, China has ample deposits, providing potential liquidity for economic growth, analysts agree.

What makes China confident of maintaining sound economic growth is its fiscal prowess, says Zhuang Jian, a senior economist with the Asian Development Bank in Beijing. Although the country's fiscal revenue growth dropped to 2.5 percent in September from more than 30 percent in the first half of this year, Zhuang says the around 30 percent annual growth in its tax revenues over the past five years provides enough for any economic bailout plan.

"China's fiscal soundness has been much better than it was during the Asian financial crisis in 1997-1998," he says. Back then, China suffered from both sluggish domestic demand and a lack of liquidity, and it had to issue large amounts of treasury bonds every year to bolster economic growth. "Nevertheless, China got through that crisis."

This time, the Chinese government has issued a number of policies to relax lending, increase export rebates and encourage home buying, and more are expected to be in the pipeline. Zhuang says the effect of those policies will be felt in the first half of next year.

UBS economists hold a similar view. "While China should certainly slow over the next few quarters, we also foresee stabilization and recovery by the middle of the year," says a UBS report. "We simply don't see any real possibility of a sudden breakdown or economic collapse."