Wednesday, February 4, 2009

China is Getting Bad ...

I love how certain financial pundits cling to the Baltic Dry Index "surging" 5% after falling 90%+ as a sign that "China is back". We've been of opposite view - China will be in trouble this year. There is no way an export laden economy will be doing well when all its trade partners are falling off a cliff. What people don't realize is China actually exports more to Europe than the U.S. So if you are of the belief that "Europe is even worse than the U.S." how can you be a bull on China? They don't work together unless you drink Kool Aid.

At this point I am hoping best case scenario things stabilize by late 09/early 10 and the political situation is stable. A few couple hundred million restive migrant workers is not a good thing. [Dec 7, 2008: WSJ - China Fears Restive Migrants as Jobs Disappear in Cities] Worst case scenario? There is one way to put a lot of people to work very quickly - armed conflict.

I think the stimulus plan, much like in the U.S. is an overstated "hope" [Nov 9: China Unveils $568 Billion Stimulus Plan] but at least with their version they will actually be spending it putting people to work. Why do we care so much about China? Because they own us; we have to care. Sort of why we have to care about the Middle East and send our President to go hold hands with Saudi princes when oil prices get out of hand. There are plenty of countries with just as nice kings as Saudia Arabia that we never go and beg for assistance.

Let's catch up on the latest from our biggest creditor (keep in mind, whatever their government is saying is understating things - that's one thing that runs true among along all governments)...

New York Times: Joblessness Jumps Sharply Among China's Migrants
  • The government offered a telling indicator Monday of the slowdown in China’s once-galloping economy, announcing that more than one in seven rural migrant workers had been laid off or unable to find work, twice as many as estimated just five weeks ago.
  • The new statistics followed a hint on Sunday by Prime Minister Wen Jiabao that the government might have to expand a recently announced $585 billion stimulus plan to deal “pre-emptively” with growing economic problems.
  • About 20 million of the total estimated 130 million migrant workers, whose cheap labor underpins China’s manufacturing sector, have been forced to return to rural areas because of lack of work
  • The specter of millions more unemployed clearly has the Chinese government worried. The government has not released annual figures on social unrest — what it terms “mass incidents” — for several years, but foreign news reports suggest growing protests as unemployment spreads... said recent layoffs and wage disputes had led to a sharp increase in mass incidents, particularly along the eastern seaboard, China’s manufacturing belt.
  • The military called upon its forces Sunday to exercise strict obedience to command in the face of challenges to social stability.
WSJ: China Jobless Ranks Soar
  • China doesn't conduct regular surveys to gauge nationwide unemployment; Mr. Chen's estimate of 20 million job losses covered only migrant workers.
  • Shuangyao's migrant workers each send home between $1,400 and $2,000 a year. Without that, those remaining behind -- mostly children and grandparents -- couldn't afford things such as school fees, extra clothing or television.
  • Farming isn't really an option, because Shuangyao is massively overpopulated. The average family's landholding is just two mu, or about a third of an acre, enough that a family can usually survive off their harvest, but not to provide any real cash income. Farmers say poverty is too widespread for a business to gain traction.
  • The current downturn, however, is the most serious since 1989, when a weak economy helped to spur the Tiananmen Square democracy protests.
  • Central-government officials have in recent weeks asked companies to avoid layoffs if at all possible, and have stepped up subsidies and training programs directed at migrant workers. The government is also stepping up monitoring of job losses, since China's official unemployment statistics don't cover migrant workers and hence have shown little change despite the economic turmoil.
UK Times Online: Violent Unrest Rocks China as Unrest Hits
  • Bankruptcies, unemployment and social unrest are spreading more widely in China than officially reported, according to independent research that paints an ominous picture for the world economy.
  • The research was conducted for The Sunday Times over the last two months in three provinces vital to Chinese trade – Guangdong, Zhejiang and Jiangsu. It found that the global economic crisis has scythed through exports and set off dozens of protests that are never mentioned by the state media.
  • However, a growing number of economists say the unrest proves that it is not the exchange rate but years of sweatshop wages and income inequality in China that have distorted global competition and stifled domestic demand. The influential Far Eastern Economic Review headlined its latest issue “The coming crack-up of the China Model”.
  • Yasheng Huang, a professor at the Massachusetts Institute of Technology, said corruption and a deeply flawed model of economic reform had led to a collapse in personal income growth and a wealth gap that could leave China looking like a Latin American economy. (or American?)
  • Richard Duncan, a partner at Blackhorse Asset Management in Singapore, has argued that the only way to create consumers is to raise wages to a legal minimum of $5 (£3.50) a day across Asia – a “trickle up” theory. (nope that doesn't work - I propse giving massive tax cuts to the rich, increasing the income inequality to the highest rate since 1920s and waiting for "trickle down" to work. It's worked like a charm here)
  • The instability may peak when millions of migrant workers flood back from celebrating the Chinese new year to find they no longer have jobs. Even security guards and teachers have staged protests as disorder sweeps through the industrial zones that were built on cheap manufacturing for multinational companies. Worker dormitory suburbs already resemble ghost towns. (But the Baltic Dry Index is up 0.002% - hmmmm!)
The rest of the story is filled with individual episodes such as
  • In the southern province of Guangdong, three jobless men detonated a bomb in a business travellers’ hotel in the commercial city of Foshan to extort money from the management.
  • At several factories, there were scenes of chaos as police were called to stop creditors breaking in to seize equipment in lieu of debts.
  • In northern China, television journalists were punished after they prepared a story on the occupation of a textile mill by 6,000 workers. Furious local leaders in the city of Linfen said the news item would “destroy social stability” and banned it.
The year of the Ox. Enjoy!

[Jan 26: NYT - College Educated Chinese Feel Job Pinch]
[Jan 13: AP - China Trade Slump Worsens; Exports Fall - So Do Imports]
[Jan 8: NYT - As Trade Slows, China Rethinks Its Growth Strategy]
[Dec 7, 2008: NYT - China's Economy, In Need of Jump Start, Waits for Citizens to Loosen Fists]
[Oct 22, 2008: China Factories Slowly Sharply]
[Sep 10, 2008: Bloomberg - Chinese Auto Sales Fall for First Time in 3 Years]

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