China Growth Is Just About Right (合适)
11/27/2008 Update Notice:
China Comment plans to return to its regular schedule of 1-2 articles a week in mid-December. Currently, in my free time, I am catching up on some China-related academic reading material. If you have suggestions of particularly insightful recently published Journal articles to peruse, I would much appreciate the advice. Thank you for reading.
I agree China will only see 8-9% growth in 2009, which is less than its previous trend of double-digit economic growth; however, this slowdown will not be disastrous- in fact, it may be beneficial. Only a few months ago analysts complained how China was growing too fast, how inflation was hurting the economy, and how high commodity prices were thrashing China’s consumers, and how the government’s artificially cheap energy market was crippling China’s energy industry.
Now, commodity prices have descended, along with $65 and lower/barrel oil. And that is highly beneficial for China. If prices for steel, coal, and other commodities remained at their Summer levels, China’s prospects for stability and growth would greatly diminish. However, if in June China could be projected to grow nearly 10% y/oy despite $100+/barrel oil, it makes sense that the country- which is rapidly developing its domestic market, can readily afford domestic investments such as those included in China’s $586 billion “stimulus” plan.
China needed this decline in commodity prices, and easing demand to allow its infrastructure to catch up to its growth. On November 14th, State Grid Corp. said “it will invest an extra 2.7 billion yuan ($400 million) to expand power grids,” (IHT), which is a welcome upgrade since over the Summer, China experienced troubling shortfalls in power distribution and production. And when the infrastructure is there to improve transportation efficiency, China’s economy will be humming again with double digit growth.
In 2006, Business Week laid out the case that “An economy growing in the 8 percent to 9 percent range would be ideal,” and China’s 2008 growth target was 8 percent, “following last year’s sizzling 11.9 percent expansion.” (China Daily, June 19, 2008). Growth at that range is more sustainable for China and can prevent the country from building out too much over-capacity. In fact, the world-wide economic downturn may ultimately benefit China. If the country’s weakest-managed companies consolidate, and if the over-capacity is not too enormous (Which it very well may be in the shipping industry.) there is a chance that Chinese companies will emerge from the downturn better managed and better equipped to compete on a global scale, like Haier and Galanz did before and emerged as national champions (also; Made In China, Donald Sull).
Larger Companies… But Many Are Larger “State”-Owned Companies. (Perhaps A Problem)
An alternative view points out that the downturn has led to larger, and perhaps stronger state owned corporations at the expense of privately held ones.
Some larger state mergers, both first announced in June but only recently completed, include:
(1) Sinotrans CSC Group, combining China’s largest logistics (state-owned) and largest river shipping company (state-owned) [so much for the anti-monopoly law.] Apparently, “The merger of the two state-owned groups is a move to consolidate fragmented state-owned groups into fewer, more efficient and focused entities which can deploy their resources for developing identified business areas.” After the merger, Sinotrans CSC will become “the country’s second largest shipping and logistics conglomerate, just trailing COSCO Group.”* (See Below)
(2) Two state aircraft makers also merged.
(3) On October 27, “China Huaneng Group, one of the country’s largest power generating firms, bought a 40 percent stake in Huating Coal Group, the top coal mining company in the northwestern province of Gansu.” Laiwu Steel Corp. and Jinan Iron and Steel Co. agreed to merge to form China’s second largest iron and steel group in February (Reuters and China Daily)
(4) On November 6th Rizhao Iron and Steel, one of China’s largest private-sector steel mills, “signed an agreement to consolidate with a state-owned rival.” (Reuters). Rizhao’s yearly output is 8 million tons of steel (CER); comparatively, the state giant Baosteel, which is being strengthened by the Central Government and is aggressively merging and acquiring assets, produced “28 million tons” in 2007 and hopes to raise its capacity to 80m tons by 2012 (FT, Nov 6, 2008). In consideration of the Laiwu and Baosteel mergers, it will be difficult for private manufacturers to grow fast enough to compete.
Jobs? Production? Trade?
The Canton trade fair was sparsely attended; and some workers’ wages have been cut in half, which will at best constrain spending and prevent China’s domestic economy from picking up the slack in growth from its export sector. At worst, this could lead to stability challenges and tax revolts as workers are laid off, then return to the provinces after find it increasingly difficult to gain and hold jobs.
Conclusion: A Strong China
Although China faces some challenges, the ameliorating effects of lower commodity prices, slowing inflation, economic reform, slash of lending rates from 6.93% to 6.66%, and some pro-export government growth policies such as “increasing tax rebates “on 3,770 export items, or 27.9 percent of all products shipped by China. [by December]” will continue to sustain China’s growing success.
Side Note on Western Manufacturing:
China’s tax rebates on export items, which were recently phased out, but which have now returned, may become a challenging issue in Europe and America, since the rebates will, along with alleged “currency manipulation,” undercut Western manufacturers’ prices. Coupled with cheaper oil and transportation costs, this will lead to a big discount and growth opportunity for Chinese exporters.
In response, Western countries may turn more protectionist, or else (barring a rise in energy or transportation costs from China), there will be another round of Western manufacturing demise.
* “Sinotrans posted operating revenue of RMB 57.7 billion in 2007, and aims to boost the figure to somewhere between RMB 80 billion and RMB 100 billion by 2010. Changjiang National Shipping focuses on river shipping. It has total assets of RMB 41.2 billion and a staff of 70,000, as of end 2007.” (SeaTrade Asia Online).