China 2009: The Confidence Deficit

Stock markets fell some 65% in 2008. Growth is down, unemployment is up. Will Beijing try to buy its way out of its problems with more exports?

By Dexter Roberts

It's a question that has economists worldwide scratching their heads: What will happen to growth in China in 2009? While some are predicting economic expansion in the mainland will slow to less than 7%, others are still hoping GDP gains will be 9%-plus.

The optimists assume China will be able to buck collapsing U.S. and European demand for its phones, TVs, sneakers, and myriad other products. Their biggest hope is Beijing's $586 billion stimulus program, announced in November. Just as important—though perhaps less likely to pay off quickly—are China's consumers. With more infrastructure spending, expanded social welfare programs, and directives ordering banks to lend, China's consumers and companies will rise to the occasion and spend more—or so the theory goes.

A quick perusal of the latest Chinese economic indicators doesn't bolster one's faith. In November, China registered a 2.2% drop in exports. That's the first decline since 2001, and the trend is likely to continue throughout 2009. Industrial production growth slowed to 5.4% in November, the lowest level since February 2002. And manufacturing activity continued to slide for a fourth consecutive month, with a PMI (Purchasing Managers' Index, a monthly survey measuring China manufacturing activity, compiled by CLSA Asia-Pacific Markets) of 40.9 in November, down from 45.2 in October. After months of worry about inflation, China now may be heading toward deflation, with prices up only 2.4% in November.

An Unhappy 2008

Reversing the decline will depend on confidence. Even as the world economy will likely continue to struggle in the New Year, China is counting on consumers to lift still-strong retail sales. Confidence, however, is just as rare a commodity in China as in the rest of the world.

China's city dwellers aren't looking back at 2008 with fondness. Chinese stock markets fell some 65%, ripping a hole in many a nest egg. Real estate prices have slid by as much as 10% in Shenzhen and other cities, and are flat at best in Beijing and Shanghai, says China's National Bureau of Statistics. Throw in continuing worries about rising health-care and education costs and it's no surprise that the national data collecting organization recorded a 4%-plus drop in consumer confidence in October, as compared to the same month a year earlier. As recently as July, consumer confidence was growing, but those days now seem long ago.

And for China's vast legions of rural residents and migrant workers, confidence in the future is also in short supply. As millions of migrant workers head back to the countryside early for Chinese New Year (Jan. 23), many will likely arrive without the mountains of gifts or cash-filled envelopes they typically bring home for the holiday.

Unemployment Surge Expected

That's because as the export downturn rips into provinces such as Guangdong, factories are shutting their doors, often leaving workers unpaid. As many as 70,000 small and midsized companies may have gone bankrupt in the past year, estimates Jeongwen Chiang, associate dean of the Cheung Kong Graduate School of Business in Beijing. Overall, Chiang thinks the bankruptcies could grow to 20% of export-oriented manufacturers in southern China. "Someday the growth engine was going to stop, and they weren't ready for it. They don't know how to handle a recession," warns Chiang.

The bankruptcy trend is expected to lead to a surge in unemployment in 2009. And there aren't many agricultural jobs waiting for laid-off migrant workers either. McKinsey & Co. estimates that another 300 million rural residents must come to Chinese cities over the next seven years.