The good people in China’s ruling Communist party would like to assure everyone that everything is perfectly fine with their economy, thank you very much. They’d also like you to know that they have a deep and abiding respect for human rights; they share your concerns about the atrocities in Darfur, and all that stuff about Tibet is just a misunderstanding. But all that can wait. There are scurrilous rumours about that China’s vaunted economic awakening is coming off the rails, and Beijing is determined to stamp them out.
Under the headline “China’s economy has ability to recover from slowdown,” the state-owned news agency last week rounded up experts from such renowned institutions as the Center for Strategic and International Studies of Indonesia and the Vietnam Cooperative Alliance to express their undiminished confidence in China’s continued prosperity. It was an unfailingly upbeat assessment of China’s latest economic data: “Nothing to see here. Please move along.”
It’s another recent article that’s garnering more attention of late, however. This one appeared in the Far Eastern Economic Review, titled “The Great Crash of China.” In it, Brian Klein of the Council on Foreign Relations takes readers on a whirlwind tour through China’s emptying manufacturing districts, its plunging stock markets (the Shanghai index is down 67 per cent since January), and the rising anxiety among suddenly unemployed consumers. “Guangdong province alone, the heart of China’s low-cost manufacturing base, has seen half of the shoe manufacturing industry close shop (over 2,200 factories) this year,” Klein reported.
As it turns out, that’s not even the hardest-hit industry. According to recent report in Singapore’s Straits Times, more than 67,000 small and mid-sized companies have gone out of business in the first nine months of this year, including over half of China’s 7,000-plus toy makers. GDP growth has slowed for five consecutive quarters, and the economy is now expanding at its slowest pace since the 2003 SARS crisis. Official estimates (which tend to present the most optimistic view of the situation) now peg the annual growth rate at nine per cent, which sounds huge until you consider that the economy grew 12 per cent last year, and must grow by at least eight per cent in order to provide enough new jobs to China’s burgeoning class of young urbanites pouring into the job market each month. Unemployment is edging higher, and industrial output has slowed to a six-year low.
If you’re looking for the key reason why the worldwide price of oil has plunged by more than half in the past few months, shelving billions of dollars in oil sands development, why the Canadian dollar has plunged an astonishing 16 cents against the greenback since the start of October, and why the TSX is off 40 per cent since June, look no further. Construction, manufacturing and retail sales are all now in retreat and the reasons can be traced back to commodities prices. Nobody is going to have much need for Canadian oil and nickel and wood pulp for a while.
This has all come as a nasty shock to a great many investors who remained bullish about Canada’s economy, despite the turmoil in the U.S., because they believed Asia’s economic surge existed in a mythical vacuum, unaffected by the roiling of its major trading clients. Asia’s “emerging middle class” would keep buying, they said. Commodity prices would stay high and we would merrily sail through the U.S. downturn. It sounded great. Too great to be true, as it turns out.
As Harvard professor Niall Ferguson explained recently, for the past 10 years China and America have represented two halves of a reciprocating engine. One side spent, while the other saved. One side consumed what the other produced. Commodity-producing nations like Canada surfed along in the wake of this economic engine Ferguson dubbed “Chimerica.” Now that symbiotic relationship has broken down.
Jeremy Grantham, one of the most widely respected fund managers in the U.S., noted last week that the Chinese economy is split roughly in thirds: one-third capital spending, one-third internal consumption, and one-third exports. Export markets are weakening rapidly. The pre-Olympic construction boom is over. And now consumers, who’ve already lost a fortune in the stock market, and watched helplessly as the value of their real estate has plunged, face the prospect of a weakening job market. In other words, just below the surface Beijing looks a lot like New York, London and Toronto. “How do you stimulate the building of a new steel mill when rows of mills are sitting empty? How do you increase exports into a global economy that is not just slowing but very weak?” Grantham asked in his latest note to clients. “This is both the most likely and most dangerous disappointment that awaits the current consensus.”
China’s government will undoubtedly go on a spending spree to cushion the blow, but there’s only so much the Communists can do. Already they are scrambling to fill cracks in the dam. Recently, 7,000 people lost their jobs in a rash of sudden factory closures, and government, fearful of riots, agreed to pay six weeks of back pay that the companies had simply walked away from.
This is a far bigger problem than most people in the West realize. Behind the impressive achievements of the Beijing Olympics, China remains a country of simmering discontent, grappling with rampant pollution and social upheaval. A surge in unemployment and slowing growth will amplify the strain and give investors a few more things to worry about.
For now, Beijing insists that the situation is under control. Here’s hoping it’s right, because the real lesson of this economic downturn is that nobody can afford to be smug. This crisis will pass like every other before it. But as the plunging loonie can attest, we’re all in this together.