Holding tight hoping the roof stays on
By Nathan Green July 18th, 2006Official figures out today show that China’s economy grew 10.9% in the first half of 2006 and 11.3% in the second quarter alone, the fastest official growth rate in 12 years. So much for efforts to cool the economy.
Fixed-asset investment, lending, and money-supply are all showing above-target growth, but it is the rocketing trade surplus that should really cause concern.
The old bug-bear hit a record monthly high of US$14.5 billion in June as exports rose 23% year-on-year to US$81.3 billion while imports climbed a slower 19% to US$66.8 billion.
Headlines tomorrow will be screaming for the emergency brake, but watch for regulators to hold tight.
China’s long-term sustainable growth strategy depends on an increase in domestic consumption in an effort to divert the economy away from its dependence on export- and investment-led growth. But if China tightens its belt to cool the economy, imports will suffer, driving the trade surplus ever higher.
But as the regulators ride out the storm, it is certain they will do so with their fingers crossed, hoping that recent tightening measures kick in before the roof lifts clean off.
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July 31st, 2006 at 5:18 pm
China Inc. ?The Economy that Defies the Economists
China’s economy continues to defy gravitation. It reported a record-breaking 11% growth in GDP and 30% growth in fixed asset investments in Q1/2006. The economy is red hot, but no sign of over-heating nor inflation?
At the same time, the industries continue to be flooded with excess capacity. Skyworth, one of the largest TV manufacturers reported huge losses during the same period. Same may be expected from many big manufacturers of white goods and consumer electronics.
If anything, there are signs here and there of deflation! I recently had a simple meal in a small, nice and clean cafeteria-style restaurant on the side street at a town in Dongguang (a boom town in the Pearl River Delta) owned and run by several young ladies who look like college graduates for Rmb 5 (US$0.65). I figured the owner of this restaurant while enjoying good business probably does not make more than Rmb 3,000 (US$400) of profits a month (her salaries included).
Perhaps herein lies some clues to China’s economy that defies the economists!
Firstly, the marginal cost of capital is near-zero; especially with respect to the SOEs. That is, their management is not held accountable to any relevant measure of cost of capital. Their ability to borrow is not based on their ability to pay back (from internally-generated profits and cash flows). For many which are publicly listed on the domestic stock exchanges, even their stock performance may not have much direct relations to the profit performance of the company.
So, it is that simple! A company may continue to increase its productive capacity and sales, while gross margin is eroding and even as net profit points southward.
Secondly, the marginal cost of labor is near-zero ?witnesseth the side-street restaurant owner/operator. The City of Shenzhen, a boom town bordering Hong Kong, recently set a new minimum wage standard of Rmb 580 (US$70) a month. If this minimum wage “law?is effectively enforced at all, it may drive away a few small factories which are at the low end of the value supply chain, but will hardly affect the big manufacturers such as Huawei or Foxconn as their labor productivity increase (due to increasing automation) has more than offset the wage increase.
Despite complaints of labor shortage, there are some 200 million of “peasants?and their children ready to step into jobs of any kind. A young man of 16 years old serving as a waiter in a small restaurant in Guangdong earning Rmb 580 (US$71) a month is sending home to his parent Rmb 200 every month! And he has two older sisters doing similar things.
Thirdly, the marginal propensity to save and consume is “tremendous? The above-described family in a village in Henan recently bought their first set of air-con costing some Rmb 1,500. Amazing stuff!
Some economists draw an analogy of China’s economy with that of Japan. Wrong again! Whereas Japan’s economy in the 70s was export-driven to a very large extent, the Japanese did not consume and only saved. In economic terms, the velocity of money was very slow. All the liquidity was stuck in the banks which led them into real estate lending and all kinds of large-scale speculations ?ultimately the bursting of the bubble economy (which had not fully recovered and will not recover to its glorious past ?that is my own speculation!).
Can China’s economy continue to defy gravitation and for how long? That is the ?4 Dollar Question?so to speak.
China’s economy (and for that matter most things in China) are full of inefficiencies, contradictions and conflicts. But this giant “half-human-half-beast?with some of its witches and gears dangling and creaking just marches on.
China’s economy is a three-legged stool resting on i) expanding exports as the “world’s factory?which is continuing to go up the value chain while costing down to 50% of similar goods produced in the West, ii) strong domestic consumption due to substantial marginal income increase (notwithstanding at “near-poverty?level by Western standards) and propensity to consume, and iii) FDI (foreign direct investment) which will continue as long as the first two conditions continue to hold.
Comparing to Japan, China has 4-5 times the population and 8-10 times the land mass. It possess tremendous capacity to absorb excess liquidity ?and inefficiencies. If it took Japan 7-8 years form its bubble economy to burst, it may take China 30 years (if at all) !!!
My own speculation : likely for quite a long time (next 10 years) ?provided the sociopolitical structure remains intact and does not implode due to internal conflicts or corruptions ?that is, the CCP and the China Inc.
Street Walker Economist - 2006-7-28