Posted by: David Rocks on December 7, 2008
If you want to experience Christmas in all its commercial splendor, undiluted by any religious sentiment or spiritual meaning, come to China. I’m in Beijing for BusinessWeek’s annual CEO Summit, and as I look around the city, I’m struck by the number of Christmas trees, lights, animatronic Santas, nutcrackers, piles of fake presents—and near-total absence of Christians. Every store seems to have Christmas specials, and the soundtrack matches that of any mall in Cleveland, Kalamazoo, or Colorado Springs: Frosty the Snowman, Rudolf the Red-Nosed Reindeer, Jingle Bells, I’m dreaming of a White Christmas, and on and on and on and on.
Yesterday morning our China Bureau Chief, Tiff Roberts, took me to meet with Jeongwen Chiang, associate dean of the Cheung Kong Graduate School of Business. Chiang told us about the Christmas promotions that department stores are offering. In a bid to boost flagging business, stores will give customers a coupon equal in value to their purchase—buy 300 yuan worth of merchandise, and you’ll get a voucher for 300 yuan. This, apparently, has led to a secondary market in the vouchers. Guys troll the aisles of the department stores offering 45% of the face value of the vouchers, then resell them at a small discount to their full value and pocket the difference. It seems that it doesn’t matter what color a reindeer is as long as it delivers sales over the holiday season!
So why the costly promotions? Underneath the shiny wrapping lies a deeply troubled economy, at least in Chiang’s estimation. He says that as many as 70,000 small and mid-sized companies may have gone bankrupt in the past year. These are the exporters that have been the cornerstone of Chinese economic growth over the past three decades, and they’re suffering mightily as the credit crunch keeps American shoppers from reaching for that extra T-shirt, toy train, or flat screen to fill the shopping cart. Chiang thinks that the bankruptcies could equal 20% of export-oriented manufacturers in southern China.
That, in turn, is hitting property prices. We’ve written recently that housing values are down by perhaps 15% in Shenzhen, and flat across much of the rest of country (after seeing double-digit increases for several years). But Chiang believes they’re now off by some 30%-40% in Shenzhen, a third or so in Guangzhou, and 10%-15% in Shanghai and Beijing. Economic growth, he believes, will slow to 7% to 8% next year—which in China is something approaching a recession. That’s a big shift for Chinese business people, who have known little but double-digit expansion for a decade. “They’re overly confident,” Chiang said. “Some day the growth engine was going to stop, and they weren’t ready for it. They don’t know how to handle a recession.”
The biggest worry, he says, is what happens in the second half of 2009. Anecdotal evidence suggests that wages for low-skilled workers are falling. Pay for maids in Beijing is down by 20% in recent months, and shepherds in interior provinces are now taking home just 400 yuan (about $60) monthly, down from 800 yuan a year ago. Many of the migrant workers who are losing their jobs from the export factories will go home to their villages for the lunar new year (Jan. 26). They won’t be bearing as many gifts as they might have in years past, but they’ll have some cash from the government to get them out of town. Once those small sums (a maximum of a few hundred dollars) run out, they’ll be on their own. And that’s when they might take to the streets, Chiang fears.
We heard a far more optimistic scenario at Tsinghua University. There, we met with David Li, who is the director of the business school’s Center for China in the World Economy. Li believes that China will see growth of 9%-plus next year—not the 10.3% it needs to provide jobs for all the young people entering the labor force, but close enough to keep them off the streets. Beijing, Li says, will order provincial governments to invest enough to keep the economy steaming ahead, and the provincials have enough sway over local factories to make that actually happen. “When the central government mandates a certain growth rate, the locals jump,” Li said. “That’s the easiest way to create growth.” When I suggested that it may actually be the second-easiest way (lying about how fast you’re growing would probably be easier), he said that there’s sufficient accountability among provincial officials to ensure that they fulfill their promises.
He readily acknowledges that this isn’t the most efficient way to allocate resources, and that there will inevitably be some waste. But he says “there is no alternative.” So Beijing is sure to plow ahead with its 4 trillion yuan ($586 billion) stimulus package, which Li says could be far more once all of the provincial governments ante up. By some estimates, Chinese provinces and municipalities are planning new or accelerated spending of some 18-20 trillion yuan.
As the temperatures dropped well below freezing last night, we bundled up for a trip to D22, where finance professor, blogger, and indie-rock impresario Michael Pettis holds court. D22, in northwest Beijing near Tsinghua University, feels like CBGB with Chinese characteristics. It's a grubby room with cheap beer, loud music, and graffiti-covered bathrooms. Mike books local bands and the occasional foreigner (we heard Girls are Waiting to Meet You, an oddball quintet fronted by a Brit), but is just as happy to opine about currency imbalances, interest rate policy, and the potential for a trade war from his perch behind the bar.
Mike is perhaps the biggest pessimist in China today, and his feeling is that much of the stimulus would create extra productive capacity, which is the last thing China needs at a time when global demand is evaporating. There’s even talk of devaluing the RMB, and China’s leadership has spent a lot of time fretting about the “loss of competitiveness” of the country’s manufacturers. While that could theoretically lead to a devaluation, my feeling is the deval-talk was simply posturing in advance of Hank Paulson’s visit this week. Mike isn’t so sure, and predicts that if Beijing were to devalue a nasty trade war would almost certainly ensue.
Even if it’s well spent, could all that cash help wean China off of the export-led growth it has depended on for so long? Most of the money will go toward big infrastructure projects, which would help both exporters and companies focused on the domestic market. The good news is that more infrastructure spending will improve access to the interior, which should help create jobs in those regions, and thus boost purchasing power. It would also make it easier for companies to distribute their goods in those regions, which would further benefit consumption.
While Pettis remains highly skeptical, Chiang allows that the stimulus will ultimately boost consumption in China, though it will take time. For now, there’s little spending power in the interior, and Chinese companies are only starting to build the kind of sales and marketing teams they need to actually sell their goods at home. “The silver lining of this economic downturn is that companies are going to turn their focus to the domestic market,” Chiang says. “But the payoff won’t come for another three to five years.”