Chinese Economy Monitor –Note No. 5

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(What will be the impact of the global financial and economic melt-down on the Chinese economy? This question should be of interest to the other countries of the South and the South-East Asian region. If the Chinese economy is badly affected, they too are likely to feel the negative consequences of the down-turn in the Chinese economy. Keeping this in view, we have been bringing out a periodic "Chinese Economy Monitor" based on open information. This is the fifth in the series)

By B.Raman

ASSESSMENT

(January 22, Chennai, Sri Lanka Guardian) Fear of social conflicts due to large-scale unemployment among the post-1980 young generation continues to haunt the Chinese authorities. The large number of young people thrown out of jobs as a result of the economic slow-down and the consequent closure of many factories for want of export orders will be joined during the first six months of 2009 by millions of young people coming out of universities and looking for non-existent jobs.

June will see the 20th anniversary of the Tienanmen Square student violence of 1989 and its brutal suppression by the Chinese security forces. If the employment situation does not improve by then, there could be a social explosion involving the young unemployed. A large number of older people have also lost their jobs not only in coastal China, but also in Central and Western China, but they are used to hardships and hold the Communist Party in some esteem for what it had done to the people since the economic reforms were introduced in 1978. The younger generation, with no past memories of hardships, is passing through a spell of hardship for the first time in their lives and they may not understand the difficulties of the party and the Government in the same way as the older generation. This is a fear that is haunting the Chinese Communist Party and Government. President Hu Jintao and Prime Minister Wen Jiabo have been touring different Chinese provinces affected by the economic slow-down in order to explain the actions taken by the Government to alleviate the difficulties of the people and to appeal for patience. Till now, their appeals have been heard. Will they continue to be heard in the months to come? It needs to be emphasized that the Chinese economy has been doing better than the economies of many other countries, including India. The difficulties have arisen from the drop in the growth rate from above 10 per cent for a number of years, which created a large number of jobs in the consumer industries, to around eight per cent, which has made many jobs superfluous. The situation has been aggravated by the dependence on exports, particularly to the US, to sustain the 10 per cent plus growth rate. The decline in export orders has led to the closure of a large number of small and medium scale enterprises.

ECONOMIC INDICATORS

2.Economic indicators for China as its economy slows down:

• By the end of November,2008, China’s tax revenue declined by three per cent as compared to 2007 as against an increase of 32 per cent in 2007 as compared to 2006.
• China’s foreign exchange reserves were estimated to have increased during 2008 by US $ 177 billion only as against an increase of US $ 415 billion in 2007.

• The monthly rate of foreign direct investment flows has declined by more than one-third since the summer of 2008.

• The combination of a crash in the real estate market and a two-thirds fall in the Chinese stock markets has resulted in many foreign and overseas Chinese investors taking money quietly out of the country despite stringent currency controls.

• China’s average monthly trade surplus, which used to amount to US $ 50 billion during the first half of 2008, came down to US $ 40.1 billion in November,2008, and is expected to decrease further to US $ 30 billion.

• To meet the needs of the US $ 600 billion stimulus package launched by the Government, the Chinese purchase of US Treasury bonds is expected to come down. By the end of October, China had invested US $ 652.9 billion in US Treasury bonds as compared to US $ 585.5 billion by Japan.
------“ The International Herala Trbune” of January 8,2009.

MANUFACTURING SECTOR CONTINUES TO CONTRACT

3.China’s manufacturing sector contracted for the third month in a row in December,2008, but the pace of deterioration slowed as output and new orders improved slightly, according to an official survey. The official Purchasing Manager’s Index or PMI rose to 41.2 in December from the record low of 38.8 in November, 2008. Readings over 50 indicate an expansion of activity, while those below 50 suggest a deterioration. “This month’s PMI shows that the Chinese economy continues to lose momentum, but there are signs of it hovering around a bottom,” said Zhang Liqun, a Government economist. “ As the adjustment in stocks of goods starts to taper off and macro-economic policies start to show results, the slow-down in growth will probably become less pronounced in the future.” Xinhua reported that China’s foreign trade rose by 18 per cent in 2008, but did not give the figures for December, which would give a clearer picture of the health of the economy. Total trade is expected to have reached US $ 2.55 trillion, Xinhua said, citing the Chinese Customs. It said that the trade surplus for 2008 should be about US $ 290 billion. That would be a new annual record, up 10 per cent from a surplus of US $ 262.2 billion in 2007.
-----Reuters dispatch of January 4,2009.

FEAR OF MASS INCIDENTS

4.“ Without doubt, now we are entering a peak period for mass incidents. This year, Chinese society may face even more conflicts and clashes that will test even more the governing abilities of all levels of the party and the Government. But the biggest threats to China’s social fabric will come from graduating university students facing a shrinking job market and diminished incomes and from a tide of migrant workers, who have lost their jobs as export-driven factories have closed down. Coastal provinces that have provided millions of lowly paid workers with jobs have reported a leap in the number returning to their villages without work. An estimated 10 million rural migrant workers have lost their jobs. Many of them were born after 1980 and lack the endurance for hardship which their elders had. According to one survey, 80 per cent of them would stay back in cities even without jobs. If there is a large number of unemployed migrant workers who cannot find work for six months or longer milling around in cities with no income, the problem will be even more serious. Protests are increasingly politicized, making it harder for officials to douse them by force or cash hand-outs. Social conflicts have already formed a certain social mass base so that as soon as there is an appropriate fuse, it always swiftly explodes and clashes escalate quickly.”

---- Extract from an article with interviews carried by the “Liaowang” (“Outlook”) magazine circulated by the Xinhua news agency as carried by the “The Straits Times” of January 7,2009, of Singapore.

“ DECEMBER BETTER THAN EXPECTED”

5.During a tour of the export-oriented industries in the Jiangsu province on January 10 and 11,2009, Prime Minister Wen Jiabao was reported to have made the following points:

• "Our aim is to be the first to recover from the financial crisis. We must have faith and determination."

• The Government will put forward a series of new measures before the annual session of the National People's Congress that begins on March 5, 2009.

• Policymakers have used proactive fiscal and moderately loose monetary policies to maintain the economy's momentum. Plus, the Government is drafting another policy package to help nine key industrial sectors hit hard by the global economic downturn.

• The National Development and Reform Commission, the country's top planning body, is likely to announce a detailed policy for the auto sector soon. The policy will offer measures like tax and credit incentives to increase the sale of vehicles.

• The Government would expedite the investment of 600 billion yuan ($88 billion) in six major projects, approved in the country's master plan for scientific and technological development over medium and long terms. He did not give details of the six projects but the master plan, released in 2006, included 16 scientific and technological schemes that were expected to be completed by 2020. Among them the development of the indigenously built jumbo passenger aircraft and the manned space program.

• China’s economy has been losing steam over the past six months because the global economic downturn has dealt a blow to its exports sector. Exports dropped in November, 2008, the first time in seven years, and the industrial output growth fell to 5.4 percent, the lowest in 10 months. But "our measures have already taken effect", Wen said. According to him, the December data were "better than expected", but he did not give details.

• Some economic indicators such as corporate revenue and electricity use have already begun to rebound. According to the China Electricity Council, an industry association, the country's use of electricity rose to 273.7 billion KWh in December, up 6.8 per cent from the previous month. In October, the use of electricity, largely considered an indicator of the country's economic activities, dropped about 4 per cent year-on-year - the first time in a decade.
---“China Daily News” of January 12,2009.

TIDE MAY TURN POSITIVE AFTER FIRST QUARTER OF 2009

6.The $586-billion fiscal stimulus package, announced on November 9, 2008, is expected to help the economy rebound during 2009, economists with the Standard Chartered Bank have said in a research note on the global economic outlook. They remained upbeat over the country's long-term growth prospects, too, despite the current slowdown. Yi Gang, Vice-Governor of China’s central bank, said at a seminar on January 11,2009, that the country's economic growth would pick up between the second and the third quarters because local enterprises were likely to have reduced their inventories substantially by then.
---“China Daily News” of January 12,2009

CONCERNS OVER CENTRAL & WESTERN CHINA

7.Du Wing, Vice-Minister in charge of the National Development and Reform Commission (NDRC), has warned that compared with the coastal regions, China's less-developed Central and Western regions are likely to suffer more due to the global economic slowdown. According to him, the fledgling nature of the industrial structures in Central and Western China, the sharp decline in the prices of the raw materials exported from these regions and a weaker capability to handle risks and social conflicts were worrisome factors. This is the first time the Government has made public such a regional risk assessment, which has been put on the web site of the NDRC. Contrary to conventional thinking that the coastal regions in East China would be the worst hit by the global economic slow-down which has already led to a closure of many of its export-oriented factories, Du believes that the financial crisis will have a deeper impact on the less-developed Central and Western regions in the longer term, though it is not yet visible. Du gave three reasons for his pessimistic assessment. Firstly, the economies in Central and Western China are largely small in scale and are resource intensive. They will be slow to adapt to the changes brought along by the financial crisis. Secondly, the dependence of these regions on the export of raw materials, whose prices are declining sharply in the international market. Thirdly, the weaker economy in the Central and Western regions will not be able to provide enough job opportunities for migrant workers returning home from the closed manufacturing factories in East China. This could give rise to social conflicts. The Central and the Western regions are China’s major labor exporters. He called for a higher allocation to these regions from the stimulus package announced by the Government.
---“China Daily News” of November 26,2008

RECESSION IN HONG KONG

8.Donald Tsang, the Chief Executive of the Hong Kong Special Administrative Region, told a meeting on the Hong Kong economy on January 19,2009, that Hong Kong’s economy, already in recession, probably contracted again in the fourth quarter of 2008 and was expected to continue shrinking in the next six months. According to him, whether the local economy recovered thereafter would depend on the effectiveness of the various Government measures around the world. He said: "We have a long and difficult road ahead of us in terms of economic recovery." Hong Kong's economy slid into recession in 2008 for the first time in five years as it contracted in the third quarter.

Gross domestic product fell by 0.5 per cent in the July-September quarter on a seasonally adjusted basis, marking the second consecutive quarter of contraction after the economy shrank 1.4 per cent in the second quarter. His negative outlook was reinforced by new figures released the same day showing that the territory's unemployment rate rose to 4.1 per cent in the October-December period, up from 3.8 percent during the September-November period, according to Hong Kong's Census and Statistics Department. Sectors suffering the brunt of job losses were decoration and maintenance, restaurants, import or export trades, transport and manufacturing. The unemployment rate is at its highest since the May-July period in 2007. Tsang said that the Government would help create more than 60,000 new jobs this year, mostly by fast-tracking infrastructure projects, to cope with the downturn. With local consumption declining sharply, Hong Kong's economy could contract at the rate of 3 per cent for all of 2009, investment bank Goldman Sachs said in research note on January 19,2009. Meanwhile, the unemployment rate could jump to 6.5 per cent by 2010 as companies focused on finance and business, trade services, and retail cut back. “These three main engines driving the labor market boom in the past few years ... are coming to a halt," Goldman said.
---- “China Daily News” of January 20,2009.

SINO-INDIAN TRADE A BRIGHT SPOT

9. The continuously increasing Sino-Indian trade was a bright spot in an otherwise negative economic picture during 2008. The impact of the global melt-down has not yet affected this trade. According to the statistics of the Chinese Customs for 2008,
China's trade with India, its 10th trade partner, reached US $ 51.78 billion in 2008, up 34 per cent year-on-year, as against the target of US $ 60 billion by 2010 fixed by the two countries during the visit of Prime Minister Manmohan Singh to China in early 2008. Chinese exports to India mainly consisted of telecommunication equipment, electric equipment, organic chemicals and other light industrial products. Some large Chinese firms have made direct investments in India. The Tata Consultancy Service (TCS), India's software company, has started a joint venture in China with Microsoft and three Chinese entities. Due to India's increasingly widening trade deficit with China, Sino-India trade friction is unavoidable. In the last quarter of 2008, India filed almost the same number of anti-dumping cases against China as it did in the whole of 2007. Besides, India has been imposing high tariffs against Chinese commodities. India is unlikely or not ready to accept China's long-standing demand to accord it market economy status . Due to the deterioration in the world economic situation, trade protectionism in India has increased. At the same time, despite such issues, it should also be acknowledged that the economic and trade cooperation potential between the two countries has not yet been tapped to the full. So long as China and India can cope with problems in their cooperation appropriately and overcome barriers in their trade and investment, they will be able to create an even better economic and trade environment for the trade and business circles of both nations and attain new, higher levels in bilateral economic and trade cooperation.
---- From an article by reporter Wang Lei in the “People’s Daily” of January 19,2009.

2009 THE MOST DIFFICULT YEAR SINCE 2000

10.Addressing the second plenary meeting of the State Council on January 19,2009, Chinese Premier Wen Jiabao called for more steps in the first quarter of this year to reverse the trend of economic slowdown as soon as possible and realize a good start for the whole of 2009. He said that last year was an unusual year for the country, especially the second half of 2008 when the Government unveiled a series of measures to counter the negative impact of the global financial crisis. He added:
"These measures have been proved prompt, correct and effective. This year is the most difficult year for China's economic development so far this century," he said. He further added that efforts should be made to enhance the implementation of the Government's economic stimulus package and measures announced to boost the country's major industries. According to him, the Government has already announced boosting measures for the steel and auto industries, and is planning similar measures for eight other major industries. He called for more efforts on agricultural production during the winter and the coming spring, and said favorable policies for farmers should be firmly implemented. Enterprises should be encouraged to intensify internal management, reduce operating cost, expand markets and stabilize employment, he said, and small and medium-sized enterprises should be given more support. Work should be done to ensure service and commodity supply during the upcoming Spring Festival as well as boost consumption in both rural and urban regions, he said.

The Government should work to maintain stable growth in trade, Wen said, underlining the need to expand emerging markets and improve the quality of exported goods. He also stressed the need to ensure the country's financial stability and safety. The Government should properly deal with changes brought about by the global financial crisis and maintain sound operation of the banking sector. He urged public servants at all levels to attach great importance to boosting employment, help people who had difficulties in life, and ensure production safety and social stability.
---- Xinhua news agency of January 20,2009.

FALL IN FOREIGN EXCHANGE RESERVES

11." China’s forex reserves have fallen for the first time since December 2003," Cai Qiusheng, an official at the capital account management department under the State Administration of Foreign Exchange, was quoted as saying. The foreign exchange reserves had topped US$ 1.9 trillion at the end of September, according to central bank figures. However, Cai did not give the figures for the subsequent months apart from stating that they had fallen.
----- Agence France Press of December 22,2008.

“ WORSE THAN EXPECTED RISKS”

12.While reporting to the National People's Congress Standing Committee on the state of the economy on December 24,2008, Zhang Ping, Minister in charge of the National Development and Reform Commission (NDRC), said that the global financial crisis would make it difficult for the country to achieve its economic targets for 2006-10, which were set when the world economy had a positive outlook. He said that the global economic downturn posed a "serious challenge" to the country, especially its efforts to realize the social and economic goals set in the 11th Five-Year (2006-10) Plan. In 2006-07, the economy grew at an average rate of 11.8 per cent, but it slowed down to 9.9 per cent in the first three quarters of 2008.From July to September, 2008 it grew by only 9 per cent. Zhang said that the country faced "worse-than-expected" risks of an economic slowdown because of the global downturn, and it was "still very hard" to say when the worst would be over. Since global economic woes had taken a heavy toll on the country, the Government has lowered its annual economic growth for 2009 to 8 per cent.
----“China Daily News” of December 25,2008.

OIL CONSUMPTION DOWN

13.According to the China Customs figures, China imported 164.5 million tons of crude oil by the end of November, 2008, up 9.5 per cent year-on-year. The growth rate during the first 10 months of 2008 stood at 10.6 per cent. However, China imported only 13.36 million tons of crude oil in November, 2008, down 1.86 per cent year-on-year. And compared with October, the Imports decreased by 17.3 per cent. The trend, according to analysts, is likely to continue into the middle of 2009.Guo Haitao, Assistant Director at the Research Center for Energy Strategy, said ample crude oil reserves and sluggish oil consumption were responsible for the sluggish imports in spite of the decreasing crude prices. He said: "China's oil demand is still on the downward cycle, and the first two quarters of 2009 are the hardest time. This is because oil demand reflects economic performance." According to the China Association of Oil and Chemical Industry, the growth rate of China's oil consumption slowed from 6.1 per cent for January-October,2008, to 5.8 per cent for January-November over the previous year. Official statistics showed China processed 27.27 million tons of crude oil in November,2008, down 2.3 per cent from the previous year.

Energy analysts with CBI, a Beijing-based market research agency, said industrial diesel demand nationwide was down 20 per cent to 30 per cent during 2008 due to the closure of many factories.
--------“ China Daily News” of December 25,2008.

WEN’S APPEAL TO STUDENTS
14.During an inspection tour of South-west China's Chongqing Municipality from December 21 to 22, 2008, Premier Wen Jiabao said: "Next year, it is an important target to stop the declining trend of economic growth and it is a must to focus on increasing domestic demands so as to promote economic growth.” He expressed serious concern over the negative impact of the global financial crisis on the city's automobile industry. The car sales have been declining since November, 2008. The decline is expected to continue during the first quarter of 2009. Wen said that the difficulties faced by the country's automobile industry would be temporary because "China has a huge market." He visited a communal social security centre to discuss about the difficulties of low-income families. He told the officials of the Centre: "The more financially challenged the people are, the greater the attention we should pay to them." He also visited the homes of pensioners and assured them that the Government would increase their pension and the subsidy for low-income families. He paid an unscheduled visit to a local university and appealed to the students to maintain their morale in these difficult months.
------Xinhua news agency despatch of December 23,2008.

15.President Hu Jintao visited the factories in the north-eastern Liaoning province from December 12 to 14,2008. Many of China’s heavy industries such as those producing iron and steel and aluminium are located in this province. He told the local officials:

"Our top economic target next year is to maintain a stable and healthy growth. We should be clear about the serious challenges and difficulties from home and abroad but also realize the great opportunities and favorable conditions in it." He stressed the importance of maintaining social stability when the economic development was facing problems. While the local iron and steel and textile industries have been affected by declining overseas orders, the aluminium industry has not been affected. The Shenyang Yuanda Aluminium Industry Engineering Co. Ltd, registered a revenue increase of 72 per cent in the first ten months of 2008 and the value of overseas orders increased by 1.5 times. Hu told the officials of the factory: "This was very rare and commendable in a shrinking international market. I hope you continue the strategy to win clients through quality products." Addressing the staff of a local employment service centre. Hu said: "Next year's employment market will be very serious, affected by the international financial crisis.” He also visited the houses of some pensioners to enquire about their difficulties.
----- Xinhua news agency despatch of December 15,2008.

(The writer is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. He is also associated with the Chennai Centre For China Studies. E-mail: seventyone2@gmail.com ) - Sri Lanka Guardian