First China Ripples of Global Financial Crisis Come Ashore – Part 1 – TradeFriday, October 24, 2008 12:18
With China’s economic engine being powered primarily by trade and domestic investment, understanding the role on the recent banking crisis on trade – and thus its impact on China – has become a focus of many.. including the Chinese government.
A big issue to tackle in a single post, there are a number of elements that I view as being the most relevant when trying to understand what is happening.
- Factory capacity closures – already seeing reports of large (public) firms shuttering
- Cargo volumes – volumes are off as much as 50% according to one account rep.
- Raw material pricing and inventories – prices are down across the board as demand has come off
- Energy usage – coal once at critically low levels is now sitting on the docks
through this, and through the monitoring the policy actions being taken to address issues related, I have come to a few conclusions
1) With some large firms beginning to go bankrupt, layoff employees, or indicate that they are stressed, it is clear that foreign based firms have been slowing their orders for some time. something I have seen in my own clients, this is not necessarily a global financial issue per se. It is a process that we have been seeing as VAT rebates were being removed, the RMB appreciated, labor costs increased, land pricing went up, and the price of oil increased.
2) While there has been an 18 month pattern of growth reduction, there has not been any slam dunk evidence of an overall retraction in orders do to the crisis.. but it is my gut feeling that within 2-3 months we will begin to see this on a level no one has anticipated. Based on my knowledge of how my first firm used letter of credit to manage their orders, and how they used a line of credit to manage their cash flow, where I see things potentially getting really nasty is when banks stop issuing credit to SME firms who depend on debt instruments to fund orders and overhead. moving to a pure cash system will result in short reduce order sizes and frequencies, and that will impact Chinese manufacturers.
3) Once foreign firms begin reducing their orders across the board, Chinese manufacturers will begin laying off employees as a means to save money..and this is where the trouble for China’s domestic market will begin. Consumer confidence in China is still quite high (the problems are not affecting us on a day to day basis.. yet), but as factories close and the service market oriented towards foreign sectors (travel, F&B,business services, etc), the tightening will begin locally as well
for China, the economic crisis initially was seen as a mixed blessing. they were already working hard to rein in the economy. Raising interest rates to 7%, removing VAT rebates, increasing capalization requirements, removing subsidies, and so on.. and it was beginning to look like things were coming off in a controlled manner. It was a process that required 2-3 years.. but with the recent financial seizure, China’s economy could experience a severe shock in the short term as one of its largest sources of income may see a signiifcant fall off for the next 2-5 years.
It will be THE test of the decouplization theory that some have been putting forward.