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Chinese Economy Monitor – Note 2

(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 second in the series—B.Raman)


At the start of the Asia-Europe Meeting (ASEM) Summit in Beijing on October 24,2008, President Hu Jintao of China said: “The fundamentals of the Chinese economy have not changed. However, the global financial crisis has noticeably increased the uncertainties and factors for instability in China’s economic development.We are now confronted with many difficulties and challenges in our economic endeavours.China must first and foremost run its own affairs well. In the light of the changing domestic and international financial situation, we will make our macroeconomic regulatory measures more proactive, focused and effective and make timely adjustments to our policies.We will vigorously expand domestic demand, especially consumer demand, maintain economic financial stability and the stability of capital markets, and continue to promote sound and fast economic and social development.”

2.President Hu was reported to have told his Indonesian counterpart during a bilateral meeting on October 23,2008, that the current financial turmoil was “grim.,” “The current world economic situation is grim and complicated.The emerging markets and developing countries are confronted with financial risks, weak foreign demand and mounting inflation,” Hu was quoted as saying.

—Source AFP


3.South Korea, China, Japan and the 10 members of the Association of Southeast Asian Nations (ASEAN), agreed in the margins of the ASEM summit on October 24,2008,to create a US$80-billion fund to fight the global economic crisis.The agreement is the first major coordinated regional action since the financial turmoil reached full force last month. In announcing the new Asian monetary fund, a spokesman for South Korean President Lee Myung-Bak said the 13 leaders had pledged to work even more closely on economic matters. “(They) agreed on the need to strengthen regional cooperation and policy coordination in the face of the global financial crisis,” the spokesman said in a statement. The US$80-billion fund would be created by the end of June next year, and be accompanied by an independent regional financial market surveillance organisation, according to the spokesman. The “ASEAN Plus Three” fund would supersede the Chiang Mai Initiative, which came into being in 2000 in the wake of the 1997/98 East Asian financial crisis to ease mainly bilateral currency swaps. Asian governments had till now mostly limited their intervention to cutting interest rates, guaranteeing bank deposits and injecting money into the credit markets – without the kind of coordinated action taken by Europe. The initial agreement called for South Korea, Japan and China to provide 80 per cent or US$64 billion, with ASEAN members providing the remaining US$16 billion.

—–Source AFP


4.At least 2.7 million factory workers in southern China could lose their jobs as the global economic crisis hits the demand for electronics, toys and clothes, according to industry estimates. Nine thousand of the 45,000 factories in the cities of Guangzhou, Dongguan, and Shenzhen are expected to close before the Chinese New Year in late January, the Dongguan City Association of Enterprises with Foreign Investment estimates. By then, the association expects overseas demand for products from the three manufacturing hubs to have shrunk by 30 per cent, as the knock-on effects of the US housing market collapse and credit crunch filter down to Chinese workers. “I am afraid it is not going to look good on the Chinese government if the decline of the export-led industries and the unemployment problem continue to worsen,” Eddie Leung, the association’s President told AFP. Leung, also a member of the Chinese Manufacturers’ Association, said the estimate of 2.7 million job losses was conservative, given that many of the larger factories in Guangdong province employ thousands of workers. Clement Chan, Chairman of the Federation of Hong Kong Industries, said a quarter of the 70,000 Hong Kong-owned companies in southern China, 17,500 businesses, could go to the wall by the end of January. Describing the likelihood as a “worst case scenario,” he said Hong Kong firms in the region employed a total of 10 million workers, but did not want to speculate on the extent of possible job losses. While small and medium-sized factories are especially prone, the threat of lay offs looms just as large over the region’s manufacturing giants, further squeezed by the appreciation of the yuan. Harry To’s Mansfield Manufacturing is a classic example of the spectacular growth in China’s industrial heartland over the last three decades. To started a metal business from a small room in Hong Kong in 1975. In 1991, he joined hundreds of other Hong Kong entrepreneurs moving their production across the border into China to take advantage of cheap labour and land. He now employs 8,500 workers in 11 factories in China and Europe. His six factories in Dongguan cover 140,000 square metres. To’s company, which is now a subsidiary of Singapore-listed InnoTek Ltd. supplies metal components for cars, plasma televisions, printers and other electrical appliances to Japanese brands including Canon, Toshiba, Epson, Minolta and Fuji-Xerox. Business for the company, among the largest in its field in China, has grown by 40 per cent annually in recent years, but with credit being harder to come by, no manufacturer is safe, he said. “With banks being so tight on their lending policies now, bringing down a factory overnight has now become very easy.” All his expansion plans have had to be put on hold. “Some of our long-time Japanese and European clients have asked us to stop producing for them in the next two to three weeks,” he said. “They said they did not want to have too much stock piled up in their warehouse as demand continues to dwindle.” To recently started building a new 70,000 square metre factory in Dongguan and was planning to hire 2,000 more workers later this year. But now, all work on the unfinished factory has stopped until more orders roll in. “No one would expand their business when the prospects for the entire manufacturing industry look so grim,” he said. Instead of hiring more workers, To is looking at cutting 1,000 employees across his operations. But far from being downhearted, he is shifting part of the company’s export-led production to developing energy-saving electrical appliances for the domestic market, which he sees as weathering the current financial turmoil. “In the long run, I am confident that mainland Chinese consumers’ purchasing power will keep rising as their Western counterparts continue to lose out.”

—-Source AFP


5.According to the National Development and Reform Commission, the export delivery value of the Chinese textile industry totaled 435.2 billion yuan ($63.56 billion) in the first seven months of this year, up 7.9 per cent year-on-year, but the growth rate was eight percentage points lower than the previous year. Industry experts attributed the decline to the appreciation of the yuan and the weakening demand of major consumption countries.Garment exports to the United States, one of the major importers of Chinese garments, increased by only six per cent in June. The downtrend of Chinese textile exports is expected to last in the short run. Whether it recovers or not would depend on the trend of the appreciation of the yuan and the US consumption demand. The Ministry of Finance has increased tax rebate rates on some textile and clothing exports from 11 per cent to 13 per cent from August 1.

—– Shanghai Security News as quoted in the China Daily News


6.The Chinese Government has intervened vigorously in the real estate market to prevent a possible collapse. Real estate contributes to 10 per cent of China’s GDP. According to Frank Gong, the analyst of JP Morgan, China’s aggressive moves to boost its ailing real estate market provide a glimpse of its unrivalled position in coping with the global financial turmoi.The Government announced measures to head off a property market crash late October 22,2008, after figures released this week showed third quarter domestic product growth slowed to nine per cent, the lowest since mid-2003. “This is big news and the actions came sooner than expected probably because the third-quarter growth was worse than expected and the slowdown has proven sharper than the Government expected,” Frank Gong said. With high liquidity, 1.9 trillion-dollar foreign exchange reserves and a stable currency, China has the most flexibility in the world to fend off the impact of the global financial crisis, Gong wrote in a research note. Propping up the property market, which accounts for 10 per cent of China’s gross domestic product, was crucial, analysts agreed. “The direction of the residential property market will determine the direction of the Chinese economy over the next 18 months,” according to Credit Suisse analyst Dong Tao.”The new measures reflect the rising anxiety about growth risks,” Dong said. Those measures include lifting the stamp tax on property purchases and value-added tax of land on property sales as of November, the finance ministry said. The People’s Bank of China said minimum deposits and mortgage rates for first-time home buyers would be slashed starting next week. The “unambiguous all-out support from both central and local level” Governments was surprising in “both timing and magnitude”, Nicole Wong, a Hong Kong-based property analyst with CLSA Research, said. This week’s economic data provided the most powerful indication yet that even China’s so-far invincible economy was not insulated from the global downturn, especially as fears of recession grow in the United States and Europe – key markets for Chinese manufactured goods. Since the figures were released, China has wasted no time in responding to protect housing and exports, key components of its economy that appeared vulnerable. The property policy decision was announced a day after Beijing said it would increase export tariff rebates on more than 3,000 items, or a quarter of taxable goods, to shore up its exports.

—Source AFP


7.Beijing is tightening supervision over Chinese financial companies by requiring monthly reports on their foreign currency exposure to ensure stability amid the global turmoil.. The new rules, which take effect this month, apply to both domestic and overseas branches of Chinese financial institutions.The State Administration of Foreign Exchange will require reports on foreign exchange assets and liabilities from institutions including banks, insurers, brokerages and fund management firms as well as the national pension fund and the sovereign wealth fund.Some Chinese financial institutions are feared to have incurred “huge losses” in their foreign exchange assets amid the global credit crisis.

—- Shanghai Security News


8.My comments: The Chinese economy is not yet as vulnerable as the Indian economy. The increased vulnerability of the Indian economy is due to the large flow of foreign money into the stock markets, which are now being withdrawn. The dramatic collapse of the stock market and the sensational publicity which it receives in the media have a greater psychological impact on public mood.The Chinese exposure to the vagaries of investors in the stock markets is much less as compared to India. The predominance of investment flows into the manufacturing industries in China and not into the stock markets gives its economy a larger safety net than in the case of India. However, an advantage in the case of India is that the Indian manufacturing industries had paid more attention to the domestic market than the Chinese manufacturing industries, which have been flourishing largely on exports to the US and Europe. The decline in export orders could prove more damaging to the Chinese economy than to the Indian economy because of the failure of the Chinese industries to develop the domestic market. Industries largely dependent on domestic demand are generally more stable in times of crisis than industries which become over-dependent on the foreign markets. This is the lesson, which the Chinese are learning the hard way. Unfortunately, the Indian IT companies and other businesses in the services sector have developed a large dependence on Western orders. They could suffer more than their Chinese counterparts as orders from Western financial and other business houses for IT services shrink.In India, the GDP growth rate was steady,but not spectacular. In China, it was spectauclar for years continuously at more than 10 per cent per annum. As the GDP growth rate and the export growth rate come down to single digits in China, the extra labour employed all these years to sustain the double digit growth rate will become redundant adding to the number of jobless. Reports from different sources in Guangdong and Fujian indicate that as a result of the downturn, many Hong Kong and Taiwanese–run businesses have not paid the salaries of their workers for about three months and that they may not be able to settle their back wages while retrenching them. This could cause social instability. The crisis has come at a time when China is confronted with the task of finding alternate jobs for thousands of workers who were brought into Beijing for work connected with the Olympics in the construction and the hotel sectors. They are now without jobs, with no prospect of getting one in the near future.

(The writer, Mr B.Raman, 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: )

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