China Update - Olympian Challenges
Misery loves company. So with GE's surprise earnings miss and guide down on its growth rate for 2008 hammering the stock market on Friday, it's only appropriate to spotlight some economic misery that is starting to impact 1.3 billion other souls; namely, the beginning of the slowdown in China. (Recall that back in October GE's Jeffrey Immelt had told the Financial Times that strength in China and India would insulate GE from any US dowturn). Now, I know China is still supposed to see strong economic growth this year. Its economy is estimated to grow 9.4% in 2008 vs. 11.4% in 2007, according to The World Bank - down from their 9.6% estimate last month and 10.9% being talked about a few months ago. Economic growth can be like heroin, though, you keep needing more and more and it gets pretty ugly when you get less. Due to imbalances in the Chinese economy, the country has grown to rely on high rates of growth.
Why does China need this super fast economic growth? While the country has made huge progress from the 1970s, when they had 250 million people living in extreme poverty, they still have 29 million or so who are barely subsisting. Additionally, the Chinese had a baby boom in the early 1960s and an echo boom in the early 1980s, creating demand for 25 million jobs or so a year, while the economy is only creating about 10 million per year. The situation is summed up well in this quote from the Tehran Times (no that wasn't a typo):
China is facing a very severe unemployment problem, says Labour Minister Tian Chengping. He said 20 million new workers entered the labour market each year, chasing only 12 million jobs.While I have sympathy for the Tibetan people, who have been in conflict with their Chinese occupiers for many years, the latest strife seems to be equally motivated by relative economic inequity between the Tibetans and the more recently arrived native Chinese Han, who have moved into the area due to the new rail links from the east and seem to be prospering more than the locals.
This overview of the situation from the UK's Guardian:
In the past two decades, new railways have economically integrated China's remote provinces of Qinghai and Xinjiang, making them available for large-scale resettlement by the surplus population.Similar strife is erupting between the native Chinese Han and the Turkic Muslim Uighur (Wee-gur) in Xinjiang. Is it just chance that these issues are coming to the fore as China's economy downshifts? Certainly, increased public attention to China being generated by the Olympics and the torch procession are a catalyst for visible protests, but so too have the Olympics been a major catalyst to economic growth in China these last couple of years. Don't be surprised that a little post partum economic depression is arriving early.
According to the Associated Press, Chinese President Hu Jintao made these comments to Australian Prime Minister Kevin Rudd recently at an economic forum in Hainan:
Our conflict with the Dalai clique is not an ethnic problem, not a religious problem, nor a human rights problem," the official Xinhua News Agency quoted Hu as saying, referring to supporters of Tibet's exiled Buddhist leader, the Dalai Lama, whom Beijing blames for fomenting the unrest. "It is a problem either to safeguard national unification or to split the motherland.The commentary belies a full understanding of the economic forces at work here.
Stock markets are the crucible wherein all economic, social and political inputs are synthesized, and the implications of the recent Chinese stock market performance are not encouraging. The Shanghai Index has already suffered a bear market decline of about 34% this year, and the outlook is overshadowed by a massive supply of shares still looking to come to market. According to Forbes, the Chinese stock market has a massive share overhang problem:
Currently, about 74.4% of the Chinese domestic A-share market, worth 24.6 trillion yuan ($3.5 trillion), is restricted from trading. These shares, mostly held by different government bodies, will be progressively released over the next five years. According to the timetable set by China's State-Owned Assets Supervision and Administration Commission, 1.6 trillion yuan ($225 billion) worth of shares could be sold in 2008. Including the unsold A-shares carried forward from 2007, Morgan Stanley predicted the total disposable overhang this year would add up to 2.7 trillion yuan ($380 billion), accounting for 32% of the market free float.
Besides the shares being successively unlocked by different government units, institutional investors that have participated in China's new listings in the past few years are also poised to dispose of their shares. Morgan Stanley said there were $64.5 billion worth of new shares floated in 2007, and 30.4% of those shares are locked up as IPO investments subscribed by institutions for as much as three years. Those shares will be flooding the market from 2009 onwards.But it's not just the overabundance of shares looking to come to market weighing on the Chinese stock market, according to The Wall Street Journal:
The National Bureau of Statistics' survey of large industrial companies showed their profit growth slowing to 16.5% in the first two months of 2008 from 43.8% for the same period a year earlier. Dragging down the figures were industries hit by rising energy costs they were unable to recoup -- chemical fiber makers, electric utilities and oil refiners. Mining companies, by contrast, showed enormous gains. Stuck in the middle are ordinary manufacturers, where growth is continuing but at a somewhat slower pace.The article quotes Citigroup as forecasting that growth in earnings per share for the all the Chinese companies they cover will be cut in half to 25% from 50%. Still healthy growth, but be mindful of the deceleration trauma. When a company grows 50% in a year it covers up a lot of warts - many caused by the unsustainable growth rate - and when the slowdown comes the warts break out with a vengeance.
China's inflation issues are one of those warts, and the government now appears to be pursuing a strategy of a stronger currency coupled with the increasing interest rate regime that has been in place for some time, to try to bring inflation under control. These policies are starting to have visible impacts, as reported in this piece on the blog of the Socialist Party Australia.org
The renminbi’s accelerating rise against the US currency - by 4.1% in the last quarter alone - has led to some of the features of a recession in southern China’s export powerhouse, the Pearl River Delta (PRD), a region that accounts for one-eighth of China’s GDP. Based on some estimates, 1,000 shoe factories have closed down in this region in the last year, most of them moving to cheaper, less regulated inland provinces, or to Vietnam and other lower-wage economies. The local government in Dongguan, an industrial city in the PRD, recently announced a new fund to help foreign companies there upgrade technologically, to shift out of labour-intensive lines such as footwear and textiles, which have faced the brunt of the renminbi’s rise.When the tide goes out you find out who is swimming naked. The tide in China has been rising for years. The ethnic strife that has lately come to a head in China may be the latest sign that the surf is no longer up. My bet is a lot of skinny dippers are about to be exposed - and it ain't gonna be pretty.
From The Internet & Blogosphere
Maybe Monks Hold the Clue to Future of the U.S. Dollar - really worth reading
China: Save the Stock Market Investor!
China's Economy The Sound of Bubbles Bursting - also really worth reading
Chinese Inflation: It's Money Not Pork
China Currency Stronger Than 7 to the US Dollar
Picture from the Deccan Herald
