There Are Many Ways China Can Hit 8% Growth – Part 1

Thursday, January 15, 2009 20:35
Posted in category Uncategorized

Last Monday I was invited back onto CNBC to discuss the current economic atmosphere, and China’s prospects for 2009.

It was another large topic to cover in 6 minutes, and as always, I felt like I left a few things untied at the end and wanted to take a minute to further explain some of my thoughts.

Will China hit 8% growth?

With my initial comment being correct “There are many ways to hit it (8%), the question is whether or not they will hit it in the right way”. It is a question I wished more time on as I think was perhaps the most important question of the interview.

It has been shown in many situations that one can use or abuse statistics depending on the point that needs to be made, and one of the primary concerns I have is simply that the 8% number has become something of a mythical giant. That to hit it means that everything will be fine, but to miss it means that the world is coming to an end.

When considering the nature of the issues that China is facing, and the ways of mitigating/ averting the impacts, I ahve begun seeing China as composed of four separate economies that each are dependant upon the other, that each will see impact points at different angles, and thus each will require a different policy set when trying to hit the magic 8% target.

to be clear though, I do not necessarily believe that the 8% is necessarily the line in the sand, and even if the 8% growth in the overall economy is somehow met, it is clear to me that this benefit to some will be at the expense of others. There is no one tide that will lift all boats, and for there to be progress, some very difficult decisions will be made to ensure that the average rises. This is nothing new for China, but I think this is a point worth repeating.

Export Economy

At this time. many are focused on the recent moves of the central party to support the export economy, and how those decisions will somehow roll back the progress made on creating a balanced playing field for non-China based manufacturers. More than anything, what I am seeing in the press and hearing from poloticians is that these moves are largely a measure for China to protect its own, and that will have a negative impact on others in the US/ EU who are alrady struggling.

However, I am of the view that many of those moves will have limited impact. That even with a higher VAT rebate, or increased tax breaks, and a a reported disregard for the labor law, China’s exporters will see little gain as the problem is not the pricing of the goods being produced in China, but a problem with the international markets not being able to physically purchase the goods at the same level they once were.

Retailers slashing inventories, auto firms stopping lines for 6-8 weeks, and new home construction slumps have all impacted the demand side of China’s export equation, and as much as the leadership here would like to think so, there is little they can do to spur consumption in the US again. It is a process that will take time, and simply making Chinese made products cheaper is not going to aid China’s economy in any material way in the short term.

Perhaps when the markets rebound, and China is competing with Vietnam and India again, these policies will hold more value from the export market’s perspective, but at this time (while consumption in China’s leading export markets is down), China’s benefit from these moves will be limited in nature and size.

Public Investment –

When judging China’s speed to shore up their economy, and the size of their stimulus package, many saw China’s ability to build a lot of roads with idle labor as a huge plus for China’s recovery. Last year, roughly 25% of overall investment went towards infrastructure – roads, bridges, ports, fiber optic cabling, etc – all of which can be said to support the economy over the long term. It was a sector that employed a lot of people, supported factories, consumed materials, and kept trucks on the road, and it is for these reasons that many see it as a good thing that the government increase their investments in these hard assets.

I remain skeptical that this will provide the stimulus some believe it will be, and here is why.

When I look at the infrastructure investments that have been made over the last 5 years, nearly every city I have been to in this time has benefited from a complete overhaul of their systems – new roads, new government buildings, new investment zones, airport, river ports, rail stations, highways, and so on. a feat that will surely go down in the history books as one of the most impressive symphonies of investment ever.

The problem as I see it though, in the context of this stimulus package, is simply that while many of the cities on the east coast are fcing slumping economies from slumping exports, others are facing a falloff in investment from foreign/ domestic firms as they are unable to find the financing to support the expansion.

Both are a problem for cities, and in the current environment, my concern is that cities will hold onto the money rather than spend it. That the rate of investment needed to support 8% is greater than the rate of infrastructure needed to support, and that a city like Suzhou, which is 100% dependent on foreign investment, will not look to build more roads, lay more fiber, or create more zones given they see no immediate opportunity to attract investment… they are already begging firms to come to take current stock.

With that in mind though, apart from the infrastructure that supports investment, an opportunity does lie in investing in China’s social safety net infrastructure – hospitals, metrolines, cleantech equipment (water, coal, food, and transportation), and a new level of education infrastructure that is similar to the community colleges of the US. These would be investments that would have long term returns, and if properly executed, would go a long way to ensuring the long term needs of China’s civil society.

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3 Responses to “There Are Many Ways China Can Hit 8% Growth – Part 1”

  1. Charles Frith says:

    January 17th, 2009 at 10:02 am

    The long term needs of China’s civil society will not be served by meeting growth targets as the are quantified today. I’ve made this point in the past on this blog in an abstract manner but I think Prospect Magazine makes a much more coherent argument than me this edition.

  2. Chicago Resident says:

    January 17th, 2009 at 7:07 pm

    First timer here. Came across your blog as I am also very interested in the Chinese market.

    The Chinese government should just scrap the 8% growth target. That number is tied to the number of new jobs annually needed to satisfy the rural influx to the cities. Well, that influx has mostly been to export-producing jobs that produce for the US and Eurozone. When you have the #1 & #2 economies in the world perform a cliff dive, there is no doubt that you (as the #1 exporter to them) are also going to suffer. That is reality.

    The Chinese government needs to realize that their economy needs to adjust to this fact, and that will absolutely require China’s production structure to be rearranged to the new environment (the non-export model). This is as much fact as the sky is blue. Their GDP might even be negative for 09. No need to worry. This is the path it needs to take to get back on the growth track. Of course, I always worry that their old communist ways shows a bit and interferes with the right thing to do. The Chinese government must still believe they can solve any problem which the people can’t do on their own. Big mistake.

    I also agree with you about the non-impact effect of the export tax cuts and infra investments. China should not re-try as an exporter. The US economy is going to take years to get back to 2007 levels. The past 5 years of US growth was based on fraud – consumers consuming more than they produce.

    I know civil unrest is a huge worry for the Chinese government. What I would like to see is the government give unemployment benefits in return for job retraining. This is akin to savings where you don’t have to produce, but can still consume as you work on increasing your productivity. One step back, two steps forward. The Chinese need to increase their productivity to American or European levels, and that can only be done with “Savings”.

  3. orgulous says:

    January 20th, 2009 at 4:29 pm

    I think these infrastructure improvements will help prepare China to shift jobs away from the rich coastal provinces to the interior. The richer areas like the Pearl River Delta were already losing their competitiveness before the financial crisis due to rising costs. The government had a plan to try to encourage a shift to the interior. The infrastructure improvements would help to accelerate this. While it might not help directly, it should absorb some of those migrant workers. There actually have been some job retraining offered in some provinces although it seems to be based on local initiative albeit with central government approval.