Woes leave legacy we can be thankful for

The temptation of delaying economic reform for the sake of so-called stability needs to be resisted

If ever you wanted proof that blessings can come in the guise of misfortune, then surely this is it.

Since China joined the World Trade Organization in late 2001, its trade has grown at more than 20 percent a year. That boom helped China to replace Germany as the world's largest exporter in 2009, and in all likelihood to become the world's largest trader by the end of this year.

But Chinese exporters and manufacturers have suffered two bouts of serious economic slowdown over the past 12 years.

The first coincided with the global financial crisis in 2008 and 2009, the world's worst financial meltdown since the Great Depression of the 1930s. China's exports experienced their largest setback as international orders drained away.

The drop in Chinese overseas shipments was not only sudden, but also deep and prolonged.

Exports fell 2.2 percent year-on-year in November 2008, after having risen 19.2 percent the previous month. The declines continued for more than a year, and growth returned in December 2009.

The wounds are still raw: Factories in the country's two major manufacturing powerhouses, the Pearl River Delta and the Yangtze River Delta, pulled down their shutters; migrant workers packed up and returned to their farmlands, and wage cuts became the order of the day.

For many Chinese exporters and workers it would have been a new experience: losing confidence, albeit briefly, in the country's economy.

But one result of these hefty export losses was that businesses began to realize that just as there can be economic sunshine, there can also be economic rain.

It was after the financial crisis that Chinese exporters and manufacturers, small ones in particular, learned to save for those rainy days through measures such as reserving part of their liquidity even when they are short of capital, carefully choosing foreign orders and employing more short-term workers.

Those measures are helping them deal with the export sluggishness triggered mostly by the European credit crisis and the US economic slowdown. The change of that mindset is remarkable, as can be gauged from my conversations with merchants in Yiwu, in Zhejiang province, over the past 10 years.

I have visited the city, known as the world's supermarket, three or four times a year since I became an analyst on the Chinese economy in 2001. I have talked extensively to business people there on each of my trips and made notes.

Between 2002 and 2007 merchants in Yiwu had a preoccupation with trade volumes and cheap prices, sometimes at risk of running out of liquidity.

"What I care most about is increasing my orders by at least 20 percent more than last year," a lighters and trinkets trader told me in 2005. "If I cannot make it, I deem myself as a loser this year. That's the way we do business. You have to get enough orders to make a great profit. That's the No 1 rule for Yiwu. If you have a lot of orders you have nothing to fear."

That kind of thinking has largely disappeared, particularly since the 2008-09 financial crisis.

When I last went to Yiwu Small Commodity City, in September, people there were talking more about liquidity, relocation and, notably, product design.

In the past, Yiwu's merchants had a humdrum product line-up. Music boxes playing Jingle Bells were a Christmas staple. This year they are still prevalent, but look different.

Among those I saw last month was one with a theme based on Gangnam Style, a South Korean pop song accompanied by a video that has become popular worldwide thanks to the Internet. The most eye-catching part of the music box is a small statue of the singer who has made the song famous, wearing a Santa Claus hat, and in a horse-riding posture.

The vendor said he came up with the idea for the box with help from his young son, and it took a week for his factory to make it. Even though it cost 30 percent more than an ordinary music box, it sold particularly well.

"You have to offer something that is in and that is different from others," the vendor, in his 50s, said. That is exactly what analysts, including me, would call innovation.

In addition, businesses are keen to adapt to market changes wrought by the continuing poor economic climate. For example, many old friends of mine who used to do business in Yiwu for years have moved part, if not all, of their production to places with cheap costs.

Relocation has been particularly evident in the past two years. Among about 50 people I have talked to over the years, there were some who said they had been gradually moving from coastal areas. A few even formed a consortium to move their garment factories to Vietnam.

This innovation and relocation demonstrates that Chinese exporters and manufacturers have become more sophisticated and resilient since 2008-09.

Such changes, in line with China's effort to move up the value chain, are highly positive.

The strong resilience of the Chinese exporters I am familiar with, most of them small and medium-sized enterprises, has changed my view.

In 2008 I was a strong defender of small and medium-sized enterprises. I called for the government to do whatever it could to help tide them over as they wrestled with the impact of the worst times since the Asian financial crisis in 1997. But now, despite the continuing economic malaise, the government needs to stay away from big stimulus.

There are at least four reasons.

First, the difficulties of 2008-09 improved exporters' abilities to endure hardship. They become mentally stronger, which is why, I believe, fewer panicked about the present slowdown. That remarkable improvement in Chinese exporters' mindset has become an invaluable asset, and we can thank 2008-09 for it.

Second, the effect of pro-growth policies implemented since April will become fully apparent in the fourth quarter.

Monetary policies usually need three to six months to show their effect. The impact of a slew of measures, such as interest rate cuts, that the government took earlier this year is about to start becoming apparent. Meanwhile, stimulus measures, mostly investment plans introduced by local governments, will also begin to be felt in the fourth quarter. So it is difficult to see any urgent need to aggressively introduce new measures.

Third, the jobs market is essentially stable, greatly reducing the possibility of a more serious economic slowdown and of social unrest.

Unlike what happened during the 2008-09 financial crisis, the present hardships do not wreak havoc with jobs. Mass layoffs have not been seen in the manufacturing and export sectors, and salaries keep on rising. The full-year government target of urban job creation has already been met with the 10.24 million new urban jobs that were created by the end of last month, representing 114 percent of the target.

Last but not least, hastily stepping in to save industries will delay the process of financial reform, industrial upgrades and the transformation of the economic structure.

China has developed a bad habit of jumping to the rescue of battered businesses when the overall economic environment is bad, often delaying economic reform for the sake of so-called stability.

That habit pampers businesses, especially those that should be phased out during China's arduous but necessary transformation from a major exporter to a great consumer.

If exporters are left to fend for themselves, the goal of achieving these great goals will surely be achieved earlier than would otherwise be the case.

The author is a financial analyst in Shanghai. The views do not necessarily reflect those of China Daily. Contact the writer at michaelzhoufeng@gmail.com

(China Daily 10/26/2012 page9)