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.