January 12, 2009
How China's Economy Affects Us, Part 2
China’s President, Hu Jintao, was recently quoted as saying, “China’s competitiveness in trade, a traditional advantage, is being gradually weakened.” This was in response to the global financial breakdown and its economic consequences.
Minister of Finance Xie Xuren said on state television that 2009 will be a tough year. An abrupt economic slowdown, shrinking corporate profits and tax cuts have contributed to a drop in revenues just as the government pledged to increase domestic spending. Fiscal revenues were down 3.1 percent in November from the previous year, in sharp contrast with gains made earlier in 2008. (Thomson Reuters, January 5, 2009)
The World Bank reported in November that China’s GDP will grow “only” 7.5 percent this year, revised downward from 9 percent, and far off the double-digit rate that has sustained in recent years. This would be the lowest since 1990. Most nations would be thrilled to experience these rates, so why are China’s leaders so concerned?
One reason is simply scale. With a population officially estimated at 1.3 billion, and more often quoted at around 1.7 billion, there are probably over 15 million kids graduating from secondary schools each year and another 2 million from college. Of course there are people leaving the workforce as well, but generally fewer in number. What’s left is a lot of new jobs that must be created.
The comparable number for the U.S. is about 3 million high school grads. That’s a lot smaller number than China in total, and it’s also better accommodated by many “baby boomers” exiting from the workforce.
What will all these Chinese young people do if they can’t find gainful employment? They’ve experienced an economic boom for most of their lives that’s raised their aspirations. Also, the incoming flow of information from outside China, which is harder and harder for the Party to control, has influenced them.
Another major issue facing Chinese leadership is the premise of production economics on which the boom has been based. Low labor costs. High, predictable volumes. Low transportation costs, both due to low oil prices and containerization. All these factors have driven the boom.
But now volumes are way down. Oil has experienced extreme volatility. Uncertainty in end markets drives a need to be closer to customers than the typical ocean freight cycle allows.
Ultimately, as these base conditions change, does the tradeoff in favor of offshore production still exist to the level that would justify the marginal entrant to participate? What about those who made the move some time ago, but may be suffering the adverse effects of these changes now? How will that play out in Beijing, or Shenzhen, or Shanghai?
Does it matter to us? Absolutely.
Since China is such a major supplier to the global electronics industry and a major consumer as well, what happens there will surely impact us here. How China’s central planners view the territory ahead will influence their choices. Will they continue the export-led strategy that has served them well in recent years? Or will they pursue a more domestic-consumption approach? Since some economists indicate that exports account for as much as 60 percent of their GDP and internal consumption only 30 percent, switching won’t be easy. It certainly won’t be fast and would require a long-term perspective.
If the leaders’ view is that global volatility is a threat to internal stability, or maybe a threat to their own jobs, they might very well implement policies that could hinder availability of relatively inexpensive labor and materials for overseas consumption. They could elect to focus on highly labor-intensive products and processes—traditionally textiles, toys, low-end electronics—rather than higher tech, higher capital-intensive sectors. This would put more Chinese people to work, but at reduced living standards. Such a decision would be a temporary salve to a long-term wound. But that’s why the leaders get big bucks.
Stay tuned, and let me know your thoughts.
- Jeff Cosman