Thursday, January 8, 2009

New York Times: As Trade Slows, China Rethinks Its Growth Strategy

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2009 will be an interesting year as we ping pong between reality and assumptions/hope/thesis. China is one of the key variables... current thesis is they will more than hold their own economically and be back to business as usual quite soon. I disagree as too much of their economy is dependent on Europe and U.S., (exports) - I think the "real" time to buy will probably be much later in 2009 as later in the year, as more data is presented there will be downside surprises at about the time people expect recovery. Remember, it's all a daisy chain that comes back to the US consumer - the whole world revolves around YOU shopping (no pressure). So get out there! Since I'm bearish on him/her, I must be bearish on China coming back so soon - but people believe government spending supersedes the functional economy so the thesis lives. And we'll see these nonsense commodity runs THIS year just as we saw nonsense "early cycle" stock runs last year. The same front running by hedgies - just a different group of stocks.

Remember, the bigger issue for China itself is 100M+ (1/3rd of the entire US population) migrant workers who need a job. Or social unrest is a major issue. And protectionism shall rise the way things are going across the East (and West). Or we can with comfortable CNBC thesis: government will save all countries, and things will be back to normal in a quite clean and easy manner "in 6 months" - so buy the stocks that will benefit from a return to normalcy. Normalcy being a 0% US savings rate of course.

New York Times: As Trade Slows, China Rethinks Its Growth Strategy
  • HONG KONG — At the docks here, the stacks of shipping containers that used to loom above the highway overpass are gone. Logistics managers say they negotiate deeper discounts every week on ships that are leaving half empty. In nearby Guangdong province, so many factories are shuttering without paying employees that some workers are resigning pre-emptively and demanding immediate pay before their employers go bankrupt.
  • In Sichuan and other interior provinces, municipal officials are desperately searching for ways to provide jobs for millions of out-of-work migrant laborers whose families no longer need them for farming.
  • Those are the effects of millions of Americans losing their confidence in the economy, feeling poorer and, as a result, pulling back on their spending. American retailers, after suffering a dismal holiday shopping season, are delaying payment for Chinese goods 90 or even 120 days after shipping, in contrast to the usual 30 to 45 days, forcing their suppliers to try to borrow more money to cover the difference. Some Chinese suppliers who cannot raise the money — many already operate on thin margins — are going out of business.
  • At the same time, retailers are demanding that exporters show that they have strong balance sheets and will not go bankrupt before completing orders. Exporters, worried the retailers will fail before paying for their purchases, are reluctant to let goods be loaded on ships. And banks, for the same reason, have cut back on guaranteeing retailers’ payments to exporters.
  • Trade finance is collapsing,” said Victor K. Fung, the chairman of the Li & Fung Group, the giant supply chain management company that connects factories in China with retailers in the United States and Europe. “We’ve got orders we can’t ship right now.” [Nov 3: UK Telegraph - Investors Shun Greek Debt as Shipping Crisis Deepens] [Oct 31: Credit Tsunami Swamps Trade]
  • Mr. Fung estimates that 10,000 of the 60,000 factories in China owned by Hong Kong interests have closed or will close in the coming months. Other business leaders say the toll may be even higher and that factory closings are an even bigger problem among mainland Chinese businesses because these tend to be smaller and more poorly capitalized than those owned by Hong Kong businesses.
  • Convert the export figures into China’s own currency, a much better measure of the effect on China’s economy, and exports plunged 9.6 percent last month. Factor in inflation over the last year and the plunge was 11.4 percent.
  • Consumer electronics manufacturers have been hit the hardest, according to customs data. “No one has any money any more, so demand for our mini hi-fi systems has declined a lot,” said Lion Yuan, the sales manager at the Shenzhen Yidashi Electronics Company, where exports have dropped 30 percent in the last year.
  • In the last two weeks, Chinese officials have announced a series of measures to help exporters. State banks are being directed to lend more to them, particularly to small and medium-size exporters. Government research funds are being set up. Thehead of the government of Hong Kong, Donald Tsang, plans to seek legislative approval by late January for the government to guarantee banks’ issuance of $12.9 billion worth of letters of credit for exports.
  • Particularly noteworthy have been the Chinese government’s steps to help labor-intensive sectors like garment production, one of the industries China has been trying to move away from in an effort to climb the ladder of economic development with more skilled work that pays higher wages. But now China has become reluctant to yield the bottom rungs of the ladder to countries with even lower wages, like Vietnam, Indonesia and Bangladesh. (this is very interesting because the stated goal was to let these bottom of the barrel jobs go to lower cost countries - sort of like when we were saying 2 years ago, the illegal immigrants are doing jobs Americans would not do; now those same Americans are displacing illegal immigrants for those jobs) China has been restoring export tax rebates for its textile sector, for instance, which it had been phasing out. Municipal governments have also stopped raising the minimum wage, which doubled over the last two years in some cities, peaking at $146 a month in Shenzhen.
  • China will resort to tariff and trade policies to facilitate export of labor-intensive and core technology-supported industries,” Li Yizhong, the minister of industry and information technology, said at a conference on Dec. 19. (if you believe the history, than trade protectionism is one of the factors that extended and intensified the Great Depression) Increased export incentives by China have the potential to create a trade issue for President-elect Barack Obama, particularly regarding textiles. (the stock market says Obama will snap fingers and China will fall in line - after all, it IS Obama)
  • But shifting toward a greater reliance on domestic demand is not easy. Chinese households have one of the world’s highest savings rates because the country’s social safety net is in tatters, with families receiving scant government help with education costs, medical care and retirement; the average hospital stay costs the equivalent of two years’ wages for the average Chinese worker.
  • China’s measures to help exporters are starting to cause concern in other Asian countries that compete with it, and raise the risk of a protectionist reaction against China. Indonesia, one of Asia’s largest markets, is preparing to impose a series of administrative measures on Thursday that are meant to reduce smuggling but will have the practical effect of making it harder to import Chinese goods.
  • In Indonesia, the third most populous country in Asia after China and India, the government is already acting to limit imports of garments, electronics, shoes, toys and food — five large categories in which Indonesian producers are struggling to compete with China.

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