First China Ripples of Global Financial Crisis Come Ashore – Part 1 – Trade

Friday, October 24, 2008 12:18
Posted in category Uncategorized

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.

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.

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8 Responses to “First China Ripples of Global Financial Crisis Come Ashore – Part 1 – Trade”

  1. EvdB says:

    October 24th, 2008 at 5:47 pm

    Agree with your view. Also, look at the savings as % of net income. China has high ratings, compared to most other regions, but I am sure this % is going up at the moment. Especially younger people are concerned about their future ability to ‘pay; their obligations (family), because they are getting insecure about the economic outlook. Many blogs are already used to discuss this topic (feeding sentiment) and when I speak to people around me, they all are in the topic. Also because they have ALL lost money on the stock exchange. It is changing the old paradigm; ‘it can not go wrong’.

  2. Jeremy says:

    October 26th, 2008 at 12:18 pm

    I think things are much worse already than what you and others are positing. I oversee the fabrication of a certain type of aluminum chasis for export, and the price of our ingot is dropping at a rate that nobody has ever seen before. It’s not just overseas demand but domestic too. I wonder when the multinationals will start trimming their China staffs? Those seem like a heft expense in a bad market. And then there’s this link, twittered yesterday:

    http://shanghaiscrap.com/?p=1664

    How much more of this kind of thing is going on? And how much will it dissuade people from doing business here? I told my wife last night that we might be out of here after Chinese new Year.

  3. Rich says:

    October 26th, 2008 at 8:46 pm

    Jeremy

    I would agree that things are probably worse in certain sectors, but over all things are holding.

    I also have a lot of AL, and as of last week we were at levels from 3 years back nominally. with the RMB appreciation though, it was still 5-10% more expensive than then, but it is 600USD a ton of its highs from last year…

    The shanghai scrap article reminds me of a few stories over the years (scrap & commodities are a really nasty business at times). I had a few friends involved in the recycled railroad steel from the US and another who was importing sand… in both cases, the prices moved and my friends lost out (one was between 2 foreign firms), and it taught me a valuable lesson in commodity trading. No matter how tight your contract is, if the price of the commodity you are selling moves 1% at any time while your load is in transit… you are screwed.

    for Scrap’s article – I just have a hard time believing that a foreigner was dragged from the Pudong airport by 5 locals at 2am… just so odd. I would have been screaming up a storm to wake up “security”.

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  5. Adam Minter says:

    October 27th, 2008 at 9:56 am

    Hey Rich –

    It sounded preposterous to me, too. But I’ve confirmed it with sources in Beijing, and in Ningbo. The individuals who seized the Gold Arrow rep from Pudong were either in total – or partly – police officers from Zhejiang. Probably Ningbo. In any event, before being taken to the outlying hotel, he was transported to a police station in Ningbo, and then picked up by the scrap company’s reps. Apparently, and believably, he asked to remain at the police station.

    My gov’t source in Beijing says that “kidnapping” is a misnomer here, all the while agreeing that “unpleasant things” happened in Ningbo. Meanwhile, officials in Beijing are promising tighter security, and assuring the safety, of all scrap industry reps traveling up there for conferences next week. Including me. Oy.

  6. Rich says:

    October 27th, 2008 at 10:05 am

    Hey Adam.

    sorry – wasn’t mean to cast doubt on the story. I am simply shocked that he was taken from inside the airport. Under no circumstances (even if I have to be arrested for squirting shampoo at people and trying to light it!) would I have left the airport.

    Knowing that he was actually at the Ningbo donut shop before going to the hotel for holding makes this even more off the charts in terms of boldness.

    Good luck next week at the fair, and may I suggest settling your contracts before going and engaging in new ones once you are safely back in your favorite cafe.

    R

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  8. Rich says:

    November 1st, 2008 at 11:23 pm

    As a follow up to this, the AP is reporting China’s Canton Fair suffers drop in attendance

    Looks like orders are going to continue dropping