China’s Economic Slowdown Accelerated in November

Even though the markets took cheer from China’s rate cut today, the move appears to be in response to an intensification of its economic woes. From Bloomberg:

Some economic indicators in China showed a “faster decline” in November, the nation’s top economic planner said, underlining the urgency of government measures to support growth and employment.

“Some economic indicators weakened further in November, showing a faster decline,” Zhang Ping, chairman of the National Development and Reform Commission, told a briefing in Beijing today. “Employment is being impacted by factory closures and many migrant workers are returning to their home towns.”

The central bank yesterday cut borrowing costs by the most in over a decade to encourage lending and ease the financial burden on thousands of companies that are laying off workers as they struggle to cope with falling orders. Premier Wen Jiabao wants consumers at home to spend more to offset the impact of slowing demand from overseas and prevent unemployment spiraling.

The government will take more measures to boost domestic consumption and bolster growth, the commission, the nation’s top economic planning agency, said in a statement yesterday. Farmers’ incomes must be raised and small businesses facing difficulties must be helped, the statement said.

Reader Michael forwarded a piece from Newsweek that provides a grim forecast for China:

Notwithstanding all the hoopla about the rise of China’s billion consumers, the body blow that’s now landing in the industrial heartland will debunk the notion that China has already begun transitioning toward a new growth model based less on exports and investment and more on household consumption. “We would love to believe it too, but it just ain’t so,” wrote Standard Chartered bank’s highly respected China economist, Stephen Green, last month. He says expecting Chinese spending to save the world from recession is “a pipe dream.”

With China at the vanguard, Asia as a whole stands dangerously exposed to external shock. Since the late 1990s, household consumption as a share of China’s GDP has fallen from roughly half to 35 percent. On the flip side, the share of Asia ex-Japan’s output devoted to exports is now more than 45 percent, or roughly 10 points higher than it was on the eve of the 1997–98 Asian financial crisis….”We are where we are because of massive imbalances that policymakers and politicians have allowed to build up over the last decade,” argues Stephen Roach, chairman of Morgan Stanley Asia. “Those imbalances were never sustainable, but the longer they went on the more they seduced people. And now we’re paying the ultimate price for that seduction.”…

China’s rebalancing act is actually much tougher than America’s…in China, where total household consumption is just 5 percent of America’s by value, the challenge is to sustain an economy that’s largely investment- and export-driven, which means finding ways to perpetuate industrial overproduction. Michael Pettis, a professor of finance at Peking University, says America found itself in the same bind back in 1929. “The U.S. in the 1920s ran a huge trade surplus and had the largest reserves in history to that point,” he says. “So was the U.S. immune to the global crisis? No. It was the country that suffered the most. In that sense it is exactly like China today.”

Beijing realizes the growth trap it’s in. Why else would it unveil on Nov. 10 a $590 billion stimulus plan—a package nearly as large as Washington’s $700 billion financial bailout—just days after it announced that China’s economy expanded by 9 percent in the July–September quarter?…

Beijing’s stimulus plan has won plaudits internationally not least because it indicates that Chinese leaders won’t stand idly by as the crisis deepens….

America’s self-defeating mistake was to cut off world trade, particularly in the Smoot-Hawley Tariff Act…. the mistake Beijing must avoid is moving too hard to sell more manufactured exports at the risk of flooding an already weak market, and triggering a protectionist backlash…..

The doubts about China’s stimulus plan arise in part because it’s all broad strokes with no fine print….. Economists estimate that only a quarter of the $590 billion is new money as opposed to previously announced spending, future tax cuts and unfunded mandates passed down to local governments. There’s reason to expect that much of the promised social spending—and the consumer empowerment it represents—may not materialize. One warning signal is that Beijing has entrusted much of the safety net stuff to the provinces, which historically have put a low priority on building schools, unless the order to do so comes with earmarked funding from Beijing…

To understand the linkage between social services and household consumption, visit a Chinese hospital. At check-in, patients are required to deposit money up-front, and when that funding runs dry they’re tossed out onto the street….Likewise, poor kids can’t attend school without paying fees, and most migrants are uninsured against job-site accidents at any price. Families cope by saving an estimated 25 percent of their disposable income, just in case….

The prescription for change has been obvious since the late 1990s. It includes balanced growth between booming east and lagging west; efforts to narrow the yawning income gap between China’s superrich and everyone else; and policies that channel the massive earnings logged by the state-owned conglomerates that dominate China Inc. back into government coffers to fund social spending. Yet campaigns with names like Go West meant to spur investment in the hinterland never amounted to more than propaganda exercises, and a long-mulled plan for the government to charge state companies dividend on their huge profits remains a small-scale experiment. In October, Standard Chartered noted a “gulf between aspirations and actual policies” illustrated by Beijing’s long-standing bias toward investment and exports, and support for “state-protected oligopolies.” Pettis argues that Beijing’s persistent mercantilism has prepared it for the wrong crisis—specifically, an external debt shock akin to the one that ravaged Asia in 1997-98, against which China’s huge savings and foreign reserve pools would make it “superbly protected.” Yet as with America in 1929, China is the nation most exposed in the world to a collapse in global demand today.

As such, Beijing finds itself in a fix as 2008 winds to an ignominious close. Export promotion offers a viable short-term means of keeping the factories of China running—yet grabbing more market share amid a global downturn is the surest way to incite protectionism. During the recent gathering of G20 leaders in Washington, much public emphasis was placed on shoring up the global financial architecture and defending free trade. Yet former New Zealand prime minister Mike Moore, who headed the World Trade Organization from 1999 to 2002, believes the backroom talks focused on the imperative that Asia not try to export its way out of today’s crisis. It was “the elephant in the room; how China, and to a lesser extent India and the Southeast Asians, must become consuming countries,” he says. “It’s overwhelmingly in [their] interest to become a lot less reliant on exports, and it also does right by the people they represent. Not to do it could trigger something that’s very, very unpleasant.” Global trade slumped 70 percent in the 1930s, and any return to the virulent economic nationalism of that era “would turn crisis into catastrophe,” warns Moore.

That presents Beijing with a leadership challenge very different from the one it confronted with tanks and soldiers in 1989. Today, it must work to maintain enough harmony in the global trade arena so as not to lose access to vital overseas markets, while telling the Chinese people that fast growth isn’t their birthright. In essence, Beijing must offer a new social contract in which consumption bolstered with a social safety net replaces the export-driven growth engine that has powered China’s economy for 30 years. FDR did that in America in the 1930s, but it took a decade. Might China’s leaders fare any better? In the late 1990s, then Premier Zhu Rongji refrained from devaluing China’s currency when many of its neighbors did so; the decision lost China some export momentum but gained its leadership a reputation for responsible global action. Today’s leaders have maintained that reputation, but given the enormity of the economic challenges at hand, the only safe bet is that their helmsmanship will be tested to the extreme in 2009. Especially if the pessimists are correct and China’s economy grinds to a halt.

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  1. ndk

    Setser has an excellent piece on this too.

    We’re making enormous policy blunders here. China’s stimulus, and to a lesser extent that in other current account surplus countries, is much too small. America’s stimulus will be very counterproductive, as a rise in real interest rates that results from our massive expansion in government borrowing steals cash and resources from corporate and household sectors that are desperately in need of the liquidity. This is easily demonstrable in monetarism (3.a), classical economics, Keynesianism, and post-Keynesianism (2.b).

    This is going to be disastrous, unless China takes dramatic action, and the U.S. gets off of its Stimulus Now! bandwagon and looks again at our fundamental hypotheses. We’re totally ignoring our own models and relying only on the conclusions they yielded under a totally different set of circumstances. The U.S. debt-to-GDP is 353%. China and India have closer to 60%. We already run a massive current account deficit, and that can’t get larger. It would only make things worse.

    Please, economists, wake up.

  2. Purple

    It was WW2 that got the US out of persistent recession. FDR’s policies mitigated the depression, but did not solve the fundamental problems.

    China cannot increase factory wages without destroying their competitve advantage on the world markets. I think the ‘internal demand’ argument falls on its face because of that.

    And 2 trillion dollars of reserves isn’t much when one considers they have a billion people.

  3. ndk

    China cannot increase factory wages without destroying their competitve advantage on the world markets. I think the ‘internal demand’ argument falls on its face because of that.

    Purple, that’s one of the reasons why government fiscal stimulus measures make so much sense there. They have a personal savings rate of around 50%, low debt levels, a huge current account surplus that is still growing, and massive cash reserves. If people can’t do the spending themselves directly, why not have the government increase health care, infrastructure, and other projects? I’ve been there, and there’s a lot of improvement that could occur.

    We’re the total opposite on almost every metric (save for our pitiful health care system). We don’t need stimulus. We need reassessment and realignment.

  4. Anonymous

    It was WW2 that got the US out of persistent recession

    And you know this… because the US had a twin that didn’t get into a war and thus stayed in a deep recession for much longer?

  5. bg

    “And you know this… because the US had a twin that didn’t get into a war and thus stayed in a deep recession for much longer?”

    The victors get to write the history books. Otherwise historical conclusions would be ambiguous.

    It is factually accurate that the US suffered worse than other industrialized countries. It is also true that unemployment was persistently high for a decade, and suddenly dropped at the incidence of the war. The suppositions from there are subject to interpretation, but anons post is consistent with conentional opinion. I similarly believe that the tulip mania was actually a bubble, and not based on the fundamental value of tulip bulbs. Although a double blind study would help.

  6. thomas j

    You mean China and other developing nations in Asia must persuade the owners of capital to voluntarily donate funds in order to lift the workers out of abject poverty by increasing wages, providing a social safety net and the wherewithal for workers to consume the goods they produce.

    Good luck with that strategy!

  7. Anonymous

    I have just been perusing the world bank quarterly update report for china which makes interesting reading. One important point to pick up on from the report is that different manufacturing sectors are performing differently. The report identifies that light manufacturing is in decline while heavy machinery and electronics manufacturing is still growing.

    Here I think the report may be making a slight mistake and may not be taking into account ordering lead times. Heavy machinery delivered now was probably ordered over six months ago at least, so I expect they have over estimated exports when they say export growth will be 3.5 percent next year.

    I would also take issue with the claim that china’s world imports will shrink by 2.5 percent next year. There will be a downturn in demand for iron ore as China’s building program stumbles, what I cannot accept is that raw material prices have at least another 30 percent to fall as shown in the commodity price graph. Part of the price declines are due to China working through its existing inventory and once that stops prices will stabilise and begin to rise. Equally any large infrastructure projects are likely to increase import demands and prices.

    The US Treasury of course is taking a gamble that China’s exports will not drop that much and commodity prices will not bounce back up as infrastructure projects start up.

  8. Anonymous

    News is just out that Panasonic expects that year-over-year, net income will drop 99% and sales will decline 6.3%. Panasonic have factories across China including Shenyang, Dalian, Beijing, Tianjin, Qingdao, Hanzhou, Anyang, Shanghai etc. The world bank expects electronics exports from China to grow?

  9. Anonymous

    Nah…I simply don’t see that analysis conclusion.

    1. China was isolated country much of the early twentieth century. The world didn’t care about china. China just shut the world out. It didn’t implode then, it won’t implode now.

    2. What if china’s technocrat decide. a few percentage down is no big deal. Let’s continue the manufacturing march, climbing up the ladder. Economy is war. (ala. Japan)

    3. Internal demand turns out to be easily created. (eg. lower worker risk by giving them insurance, better healthcare, accident protection, less corruption, etc) Put more money into people’s hand and create even bigger earnign power.


    So the biggest question:
    The west have been kicking around china and isolate it much during cold war. And now screaming about protectionism?

    If I were the chines, I would double down the bet and start trade war in the fringe. Africa, Latin america, eastern europe. Hold south east asia.

    hey… it’s cheaper than invading a country.

    (Not to mention Taiwan and North Korea case)

    New Zealand means nothing. That country is jsut a slightly bigger version of iceland when there is massive trade war. China can buy NZ dollar to stratosphere to kill it’s export price. Then dump it to kill internal import power.

    Bottom line, China is third biggest world economy, I seriously doubt they like being threated like they are nobody. And they will lash out.

    They have $2Trillion cash for gawd sake. Enough to buy much of the planet.

  10. Anonymous

    Purple said…
    China cannot increase factory wages without destroying their competitve advantage on the world markets. I think the ‘internal demand’ argument falls on its face because of that. “

    How so? In economic war…

    increase wage by 5%, drop currency value by 2% (by keep buying dollar)

    increase industrial investment by 100%, to start competing in higher value products. Thus wage increase really isn’t a factor.

    (plus, seriously, all those low tech manufacturing can be automatize. And the chinese will soon make their own automatic machines. Much cheaper machine run by cheap labor, with muc efficient transportation geography)

    Don’t forget that much of 16th to 18th century, this was what china is about, global manufacturing center.

  11. Anonymous

    Red China is a perfect example of how not to run a country. Granted you can make great gains by enslaving the populace but the individual incentive to strive when any outstanding gains will be absorbed into the collective leaves initiative in the back of the cupboard just behind desire.

  12. Anonymous

    Wouldn’t all these comments be true IF the US and China didn’t have (generally) the same interests (them making and US comsuming) AND that the concept of “money” actually meant what it did (say) 10 years ago? What if totally fake money was perfectly ok now? Perhaps only the peasantry needs this money “concept”?

  13. mft

    “…China, where total household consumption is just 5 percent of America’s by value…”

    Only 5%?

    If I’m not mistaken, that means that a 10% fall in US consumption (allowing a needed 10% rise in US savings) would require Chinese consumption to rise by 200% if Chinese reflation were to maintain world demand!

    Oh dear!

    Perhaps the exact numbers look a bit different, but I think the point is taken. It’s a no go.

  14. Anonymous

    Seems like just yesterday Japan was doing bombing and strafing runs over Chinese land and occupying large portions with untold deaths of soldiers and civilians related to the conflict (est. 20 million) as US direct involvement helped end the conflict.

    Then today on going Chinese civil war (Tibet) including Taiwan later on.

    But I’m sure they have their financial house in order.

  15. mxq

    Speaking of healthcare and education…the Chinese gov’t obviously doesn’t care about them as FT quoted today:

    “Mr. Zhang provided the first breakdown of how the [fiscal stimulus] money would be spent, indicating that nearly three-quarters of the Rmb4,000bn (£382bn, $586bn, €452bn) investment over two years would go on infrastructure projects.

    He said that Rmb1,800bn would be spent on railways, roads and airports, with a further Rmb1,000bn on disaster reconstruction, especially in the region of Sichuan province, hit by an earthquake in May.

    About Rmb370bn would be spent on rural development and Rmb40bn on health and education.”

    So healthcare and education…two of the most critical aspects in procuring a bourgeoning domestic led economy…yet, they are allocating little more than the equivalent of a Bill Gates fart…~6bn?!?

  16. ndk

    So healthcare and education…two of the most critical aspects in procuring a bourgeoning domestic led economy

    Thanks for finding those numbers, mxq. I’m not terribly surprised by them. As I’ve mentioned, a life just isn’t really highly valued there. Safety standards are very low, and there are fifteen people ready to take your job if you don’t work your ass off, or if you happen to get injured. Disabled people are basically on their own. Lots of sick and dying strays, too…

    They just have too many people, and haven’t reached the conclusion that making those people feel secure is key to economic growth and political stability.

    The education system is actually quite good, though, much better than Japan’s in my opinion. The kids at Peking University that I worked with were top-notch. English education is compulsory and constant from a young age, so people speak it much better than do Japanese or Koreans.

  17. mxq

    ndk: “The education system is actually quite good”

    I don’t doubt it. The problem, in my opinion, is if you want to get that education, you gotta pay to play, and $6bn is not gonna help anybody pay. (back of the envelope…thats $6 for every man woman and child to split between healthcare and school for the next 2 years…crazy)

  18. TexasChicagoCali

    Without personal freedoms they are always going to be doomed, IMHO.

    It is a complete shame.

    However, regardless, they do have soooo many people it is an incredibly difficult task ahead. Those of us born into industrialized/developed nations are blessed.

    I don’t think China or India will really rise out of poverty until technology is sufficiently advanced that global poverty in general can be combated. This could be 100s or years from now.

    Otherwise, massive social unrest/strain will always exist, regardless of “GDP” or whatever the hell metrics.

    So, sad to think what a trick and pony show the Olympics were, to hear how so many live over there.

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