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By the standards of just about any other country, the latest growth figures in China would be a cause for jubilation. The country clocked 6.8% year-on-year growth for the fourth quarter of 2008 and 9% for the year. But those figures mask an underlying picture that is anything but rosy for an economy that is just starting to feel the full impact of the global meltdown. In fact the economy registered virtually no growth over the third quarter, and things are going to get a lot worse before they get better. "The situation is quite dire," says David Cui, China economist at Merrill Lynch. "I don't expect us to come out of this any time soon because the global demand situation is so bad."
Cui isn't the only bearish one. David Wong, vice-president of the Chinese Manufacturers Association of Hong Kong, says its members are bracing for a difficult year. "This is unprecedented among our manufacturers," he says. "This is the worst that anyone can remember." Qu Hongbing, China economist at HSBC (HBC) says China could see growth dipping as low as 6%, dangerously short of 8%, widely regarded as the level needed to generate enough jobs to absorb new entrants into the workforce. "Export contraction will only be deeper when global demand continues to shrink, so we'll see more job losses. Consumers will become more cautious. And if this continues, there is a real risk of a downward spiral."
Things could have been even worse. The $586 billion fiscal stimulus package unveiled by Beijing last November should help restore growth in the second half as big-ticket infrastructure projects get under way. But that recovery won't provide a lot of comfort for China's neighbors and the rest of the world, as the rebound will have limited benefit beyond China's borders. "China can save itself, but it cannot save the rest of the region," says Dong Tao, chief economist for Asia at Credit Suisse (CS).
Indeed, about 70% of China's imports from its neighbors are components used as inputs for export-oriented industries. As a result, the global slowdown is creating a double whammy for Taiwan, South Korea, and Southeast Asia. On top of falling exports to the rest of the world, shipments to China have collapsed, too. Take Korea, for which China is the biggest export market. Korean exports to China plunged 32.9% in November year-on-year and 32.3% in December, while overall exports fell about 19%. China is the biggest export market for Japan and Taiwan as well.
Some are hoping that Beijing will be able to make up for the slack in exports by encouraging its own consumers to open their wallets. But domestic rather than foreign suppliers will get the new business. For example, the government's 13% subsidy to rural buyers of household appliances will stimulate sales of low-end televisions and refrigerators that largely include components from domestic suppliers and hence will do little to boost the demand for Asian rivals like Samsung and Toshiba (6502.T).
Even Chinese companies that do manage to make up for lost overseas sales by selling domestically will see their margins squeezed more than ever. "Everybody will be trying, but the local market isn't going to double in size overnight," says Tony Huang, CEO of Shanghai Sigma Metals, which produces secondary aluminum alloys from recycled materials. The company, which operates the world's largest smelter for such alloys, has seen its exports plunge. "It's going to be a brutal fight for the domestic market," he says. That means lower profits and a reluctance to expand capacity, prompting a serious slowdown in private fixed-asset investment for nonstate-linked companies that still rely primarily on retained earnings to finance their expansion.
Pump-priming by China may restore headline gross domestic product growth by yearend, but that is largely an inward-looking policy that attempts to wean China from its dependence on exports. By merely substituting government spending to replace foreign demand, China can buy additional growth for a couple more years. That, however, does not address the underlying need to make consumption and private investment the principal engines of growth. "The natural tendency is to build another airport," says Huang Yashang, an economist at Massachusetts Institute of Technology. "But the issue is to channel entrepreneurial activity to help the Chinese people as a whole."
Another big part of the puzzle is the property market, where volumes have plunged as buyers wait on the sidelines in anticipation of lower prices. Housing is hugely important to the economy, accounting for 25% of fixed investment, and is a principal form of wealth holding for the Chinese, whose only other choices are bank deposits (which offer a negative real return) and the shaky stock market, down some 65% in the past 12 months. Sales have slowed further in recent months, which in turn has led cash-strapped developers to slash prices in a downward spiral of falling prices and sales.
Balfour is Asia Correspondent for BusinessWeek based in Hong Kong.