Monday, November 2, 2009

Improbable China - Part One

On the weekends the line to see Chairman Mao's' body in his masoleum in Tiananmen Square can stretch for blocks. This fall Beijing is full of Chinese tourists. In the Forbidden City, in the Summer Palace and especially in the brand new malls and shopping complexes, groups of rural tourists in matching red or yellow baseball caps troop diligently behind their guides and stare the big new city.

These travelers are from an older China. They come from the farms and small villages where the majority of Chinese live. In the countryside change is slow and life conservative. But almost all of what they will see in Beijing is brand new. The sleek office towers and highways, the Olympic stadiums and fleets of new cars did not exist 20 years ago; most of modern Beijing was built in the past decade. The sights of the capital must be far more amazing to a farmer from Yunnan or a herder from Gansu than to a visitor from New York, London or Moscow.

But these visitors are not just tourists; this new China belongs to them also. Their attitude and good will matters and maintaining their support for the economic policies of the government is one of the chief goals of the Beijing rulers. If China is to continue to prosper it is these people who must be given a chance for the life that has already arrived for many others in Beijing, Shanghai and Guangzhou.

China largely escaped the ruin that came over Western financial institutions last fall. But it could not avoid the economic effects of the debacle. The Chinese government has attempted to sustain its economy by spending more than $900 billion of its own funds to support its $4.3 trillion economy until the global trade system recovers and demand for goods once again flows to Chinese factories.

Chinese economic growth since the crash of last September has never approached the standard recession definition of two consecutive quarters of negative GDP. Third quarter growth as recorded by the government was 8.9%. It was 7.9% in the second and 6.1% in the first.

These figures are deceptive twice over. China's population of 1.33 billion is still growing though only 0.65% a year and the government estimates that 8.0% GDP expansion is necessary just to give each year's new workers employment. But internal migration of rural agricultural workers to the cities and economic development zones is adding uncounted millions more job seekers to the unemployment roles of the new industrial China. These workers have to be accommodated or sent home.

Obtaining an 8% year on year increase in GDP is the bare minimum acceptable to the Beijing economic planners. In the minds of the central authorities anything lower risks the civil unrest that has so often in China's history shaken the hold of the central government.

Rather than adding to the stock of national wealth the 7.7% National Bureau of Statistics growth estimate for the first three quarters of 2009 is best viewed, and probably by the government as well though not in official pronouncements, as a successful stop gap rather than a permanent accomplishment because it has been produced by an expenditure of saving rather than a permanent advance in capacity to meet expanding demand.

Is it really surprising that a cash and credit stimulus over a year worth almost one quarter of national GDP has produced a burst of economic action? How could it be otherwise? But even the reality of the 8.9% growth can be called in question.

Various secondary statistics including year over year figures for exports, down 23.0% in July, 23.4% in August and 15.2% in September and imports, off an average 11.8% monthly in the third quarter do not draw a picture of economic expansion let alone 8.9% activity. The Chinese economy is almost 40% dependant on exports for GDP; if exports are not increasing what is generating the demand for Chinese products? Domestic consumption, retail sales?

As with the astonishing figures for auto sales, 70.5% higher in July, 94.7% in August and 83.6% in September which are undoubtedly supported by government purchase incentives, retails sales statistics are likely inflated by provisions that do not reflect actual end consumption. Retail sales rose an average of 15.36% per month year on year in the third quarter and 15.00% monthly in the second. But sales statistics include goods produced but not yet sold, the equivalent of inventory and sales numbers in the United States. Although it is probable that the Chinese economy is growing due to the massive government involvement it is improbable that it is expanding as rapidly as reported by national statisticians.

In purely anecdotal observations over the past week the malls are full of people but buyers are few and even department store clerks resort to actively touting their goods. Everyone questioned considered prices in the property market to be highly inflated. The status of private real estate is unclear. Typically 75 year property leases are treated and sold as ownership.

China's willingness to do what is necessary to keep its economy growing and her having amassed the ability to do so on her own can certainly be applauded but her actions should not be mistaken for an altruistic contribution to global economic well being.

It is understandable that the world should look for a new economic savior but China cannot support the global economy on her shoulders alone. If lower consumption and GDP have really arrived in the United States, they will not be far behind in China.

FX Solutions

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