China’s exports in January were down 17.5 per cent on last year and imports were down by 43.1 per cent. Peter Main, just returned from China, looks at Beijing’s response to the world recession.
There is wave of factory closures across coastal China. Danny Lau, chair of the Hong Kong Small and Medium Enterprises Association, said more than 5,000 Hong Kong-owned factories had closed since July and about another 3,000, of the remaining 60,000, were under threat of imminent closure.
The direct cause is the loss of exports.
• Trade with Japan is down nine per cent.
• US trade decreased 10 per cent.
• Trade with the EU shrank by 17 per cent.
Even more dramatic are the results for China’s Asian trade:
• 25 per cent down overall.
• South Korea trade down 29 per cent.
• 35 per cent drop in exports to Hong Kong – still a key conduit for the export industries of Guangdong province.
In February, Beijing doubled its figure for how many migrant workers are now out of work – from 10 to 20 million. Even that is only an estimate because many firms have prolonged the Lunar New Year holiday into March.
The colossal impact of the recession can be seen from figures released by Semiconductor Manufacturing International Corp (Smic), the mainland’s biggest chipmaker. Smic has posted its seventh straight quarterly loss as orders slowed amid the global recession. The fourth-quarter net loss widened to US$24.5m from US$622,000 a year earlier as sales fell 28 per cent to $272m. The company said it would cut capital spending this year by 72 per cent and lower payroll costs by 15 per cent.
As more and more firms follow this pattern, heavy industry has also been hit. Annual capacity for mainland steel plants is more than 600 million tonnes but last year actual production came to about 500 million tonnes. As a result, Baosteel, the biggest producer saw earnings fall 32 per cent compared with 2007, while the second-largest producer, Angang, said profits dropped 55 per cent.
Nonetheless, it is the import statistics that are really ominous because they point to a continued decline. A huge part of the export trade is of goods assembled in China from components shipped in from elsewhere in Asia. A downturn in imports, therefore, means that China’s factories have shrinking order books.
Beijing’s answer to the crisis, a “stimulus package” of 4 trillion yuan (some £400 billion), was announced in the autumn. The emphasis was to be on infrastructural development, aiding industry and boosting consumer demand, particularly in the rural provinces. Much of the railway and road building appeared to be an acceleration of existing plans, but provincial authorities were also encouraged to develop new projects and to assist struggling firms.
However, what Beijing wants is not necessarily what Beijing gets. Although many of the biggest firms are still state-owned, they are no longer co-ordinated by any plan and many will pursue their own priorities. For example, on 3 February, Premier Wen Jiabao revealed that bank lending surged 900 billion yuan in the first 20 days of January and presented this as a response to the government’s efforts to spur economic growth and liquidity. But analysts said that only 780 billion yuan, about 65 per cent of the month’s total, were estimated to be “real” loans that would affect recovery. Figures from Industrial and Commercial Bank of China show what happened: more than half their loans, 135 billion yuan, as against 117 billion yuan of other loans, were simply “discounting” of commercial bills.
Nonetheless, where the government is itself the agent for major projects, it can be sure that money will be spent on its priorities. Certainly, building roads and railways will maintain demand for concrete and steel and will keep workers in jobs in those industries and in civil engineering. Moreover, unlike in the US, this spending can be financed out of existing reserves.
Boosting consumer demand is the principal support for light industry. Beijing plans to lower consumption taxes and give rural consumers a 13 per cent rebate on domestic appliances. The intention is to offset the loss of foreign markets but it is difficult to see how a rural population on very limited incomes, tens of millions on less than US$2 a day, could possibly take the place of the credit-fuelled consumer booms in the US and EU. And, after all, what is 13 per cent off washing machines in comparison to the loss of 20 million migrant workers’ weekly remittances to their families?
Beijing’s response to the world recession is not only a matter of intervening in the national economy. The government also intends to advance China’s status and profile internationally. Chinalco, a state-owned aluminium company, is planning to invest US$12.3 billion in Rio Tinto, the world’s second biggest mining company, raising its stake to 18 per cent. This confirms the strategic policy of securing future sources of raw materials.
At the same time, Beijing is also strengthening its financial sector. By insisting that loans for the building of a 29 kilometre bridge across the Pearl River estuary be denominated in yuan, Beijing has effectively excluded foreign banks from taking a lead in this major project. In addition, some restrictions on the international circulation of the yuan have been lifted. Trade between Hong Kong, Macau, Guangdong and Shanghai can now be conducted in yuan and ASEAN countries will also be allowed to trade with the provinces of Guangxi and Yunnan using yuan. These moves are seen as the first very tentative steps towards making the Chinese currency fully convertible and, potentially, a world reserve currency.