How to spend your way of a crisis
Trip Start
Jan 30, 2007
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Trip End
Dec 31, 2011
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Kunming,
Yunnan,
China
Monday, November 24, 2008
Probably not.
They might instead say you should reduce your expenditure. And try to earn more.
So I am somewhat surprised by China's latest move to essentially buy its way out of trouble.
Since China has become a global player on the trade scene, its economy has grown at double-digit fitures. There's been a huge amount of internal growth - go to any of a thousand cities in China and in the last year each would have probably changed beyond recognition.
When the financial crisis first hit the headlines earlier this year, China made out it didn't mind - it was buffered from the rest of the world, and while the US and Europe went down, China would carry on business as usual.
Well, that clearly isn't the case. Why?
China's economy is hugely dependent on exports. Go to any shop in the world and more than half the products are likely to have their original in polluting, sweatshops in China.
Already, some factories have had to close down, because of the limited access around the time of the Olympics for buyers and inspectors, and more recently, a global downturn in demand. In short, because the West won't be forking out too much for Xmas presents, migrant labourers will be forced out of industrial areas.
It isn't all bad news. Perhaps in these tighter times, more will turn to China for cheap products. It's currency is tagged to the US dollar, so as the US dollar strengthens, it will be more expensive for goods from China.
China recently announced a huge financial package to help its economy. And it is huge. At least more than the pocket money I earned while mowing lawns. Some US$586 billion til 2010.
But what gets me is that the solution proposed seems a little too like the cause of problem: overconsumption.
And what's more, Chinese are distancing themselves from the crisis. Look at this from a China Daily commentator:
as the worldwide economic crisis in the United States is taking relentless tolls on all fronts, China's policy makers seem to be prompt with a rescue package
So it's the US's problem? I don't think so.
For China, which has enjoyed so much economic growth over the last 15 years, the downturn could signal the beginning of the end for its role as the world's cheap factory. Despite all the wisdom of economists and analysts and politicians, there is a simple concept that hasn't been grasped. We live in a closed system - planet earth - and you can't continue to have unlimited growth in such a system. Sooner or later you run up against resource shortages, when unrenewable things start to run out. That's already happening with many minerals. Don't get me started on oil.
What grates me the most in this conversation, is that people in China - and elsewhere to less of an extent - are saying we can spend our way out of this problem. The commentator above - Li Hong - has an opinion piece entitled 'Spend, Spend, Spend'.
He cites Deng Xiaoping, the guy who began opening China up and turning it into a capitalist society. "Development overrides anything" DX once said.
But when people abroad don't want to buy more of your crap, and people at home are wondering if they really need a bigger TV or the latest mobile phone, China will be heading into the same kind of recession that the rest of the world is already in. Overseas economists are downgrading their forecasts for China's GDP growth from above 10% to less than 8%. In China, where exports make up half the GDP, Li Hong has an ingenious solution:
I will argue that, at the current stage of this serious predicament, rigorous spending by the government and consumers is the only way to spare China of a crash landing.
But he's not sure this will happen, because despite a sudden drop in oil prices, petrol prices in China have increased (they are heavily subsidized to encourage growth)- so drivers pay 40% more than drivers in the US. Tax cuts haven't materialised - if you earn over 2,000 yuan - about $300 a month - you get taxed.
Li Hong is downbeat and wondering why the government isn't getting at real estate agents or oil companies. He comes to this conclusion:
Without spending, all the world's markets will founder, leading to rising unemployment and worsening economies. China's isn't excluded.
If China's housing and auto markets go in the way of their Western counterparts, and the Chinese middle class have less and less money to spend, the scenario surely doesn't bode well for China. Also, other countries' hopes of a rapidly developing China to help alleviate the impact of a global recession will evaporate.
He's also worried abut deflation, where prices decline - a consumers dream; an economists' nightmare:
And, spending -- only powerful spending -- could avoid deflation from popping up in China and crippling the economy.
In all, spending is the only way out for China, and for the world. Any policies that run against spending will worsen an already sagging economy, and must be abolished now.
http://www.chinadaily.com.cn/china/2008-11/21/content_7228744.htm
China's spending package is more of the same. Instead of investing in people or education, the package is fast-forwarding infrastructure projects. When I read the proposed developments, the words 'environmental degradation' 'shoddy construction' and 'corruption' come to mind.
Last week China's provinces asked for some 1.4 trillion dollars to essentially build more roads. If granted their wishes, the provinces would like to cover the whole of China's vast landmass in concrete.
The theory behind China's package is to encourage more domestic growth, boost consumer spending, and somehow ignore that last year's buyers overseas this year aren't buying anything.
But it turns out that some of money promised is money that was always going to be spent, and that much of the hype was just hype to make everyone feel better.
So when the local governments came up huge building projects, they may only just get the hurry-up for projects already underway.
My own 'hood - Yunnan - the former opium growing region, came up with the biggest proposal, requesting 3 trillion yuan over the next five years - that's a hell of a lot of banquets, karaoke and brothel visits.
One of the funny things to come out of all this is that the Chinese premier, Wen Jiabao, the leader of the largest Communist nation on earth, called upon companies to boost confidence and adapt to market changes to weather the global crisis.
Wen, along with just about every other CCP official, should be worried about the sharp drop in growth, along with the growing ranks of unemployed. If they read between the lines it signals unrest.
Which is why improving rail links (the poor can afford trains, but buses are more expensive), plans to provide low-cost housing, etc, are designed to buffer the potential unrest of the rural poor.
Yet it still unclear where this money will all come from - from central government or provincial government. In earthquake damaged Sichuan province, they are reconstructing a railway line to Dujiangyan, which used to be a tourist site thanks to 2,200 year old dams and weirs along the Min river.
The 13.3 billion yuan rail project will be able to carry up to 20,000 people per hour at speeds of 200 km an hour, along the 66 km between Chengdu and Dujiangyan, Xinhua said on Sunday. It will be completed by 2010.
The Wall Street Journal ran a story this week, highlighting concerns about waste and corruption for all those trillions of yuan. Local governments are using the current crisis to get approval for projects previously dismissed. However monitoring will ensure that the extra cash isn't used for office buildings or industries that pollute.
So it seems that the government has been happy to restore confidence by saying they will shell out lots of dosh, but in reality they might not front up with it. It's like the father driver promising the kids in the back seat ice creams if they are good, but then driving right past the ice-cream parlour.
A recent Nielsen Global Consumer Confidence survey found that the government stance is working:
Chinese consumers' confidence has remained relatively stable since the second half of 2006 and even experienced a slight increase.
Over half of Chinese consumers are optimistic about the state of their personal finances in the coming 12 months.
"While other countries' consumers may be struggling to keep their heads above water, more than two thirds (72 percent) of Chinese consumers -living in one of the fastest growing economies in the world - are optimistic that their country is not currently in a recession, nearly twice that of the global average (37 percent)," said Chris Morley, Managing Director of the Nielsen Company (China).
The survey also found that nearly half will put extra cash into stocks or mutual funds - this is hugely optimistic, given that in the last year the Chinese sharemarket has shed more than half its value. Holiday travel came up first on their list of what to do, once essential costs were covered.
Meanwhile some Chinese commentators are urging Chinese to travel overseas, taking advantage of the rising Chinese currency.
The current crisis is also highlighting the emerging middle class in China. While in the country, there it little chance to escape poverty, in the cities, those with jobs in government, in state corporations, or with their own businesses, are earning more and more.
China reported a per capita gross domestic product of $2,042 in 2007, but middle class Chinese are earning lots of money - and spending it on holidays, clothes, cars, and electronics.
While the communist society of the past left no-one outside, the new world order in China has turned class struggle into middle-class struggle.
China Daily says the new class has stirred up controversies. "Many people believe "middle class" is a lifestyle. They think a middle class family should own at least one apartment and one car, have a golf club membership, and often travel overseas. In other words, it is a lifestyle of the rich."
So more Chinese are buying "affordable luxuries" and favouring international brands. I see it with tourists visiting here, as well as locals trying to buy famous brands (they are mainly knock-offs and fakes in this part of the world).
This is all good news if you are an economist or marketer. But as for the environment?
Fortunately marketing gurus like Viveca Chan are saying that Chinese consumers were turning from shopping for "outward recognition to inner substance.
According to McKinsey Quarterly, the business journal of McKinsey & Company, the urban affluent are the ones who will shape the future China:
These consumers earn more than 100,000 yuan a year and command 500 billion yuan - nearly 10 percent of urban disposable income - despite accounting for just 1 percent of the total population. They consume globally branded luxury goods voraciously, allowing many companies to succeed in China without significantly modifying their product offerings or the business systems behind them.
This shows that trying to improve domestic spending might not happen, if newly affluent Chinese prefer imported brand products, rather than cheap, local goods.
http://www.chinadaily.com.cn/bizchina/2008-11/17/content_7210789_2.htm
