I thought I would bring up into the blog itself a comment on a previous thread by Hanyu about the state of the Chinese economy. It’s a worry, but it is not unexpected for anyone who understands the sources of economic growth.
All of the Chinese factories with which I deal on a regular basis are experiencing fewer and smaller orders than that 2.7%-rise-in-export-figures suggests. Where are the factories taking all these increased orders? Okay, some obviously are (iPhone 5 is about to hit the shelves so someone is cleaning up there, but on reduced margins), but they are surely the exceptions.
I drive around the Shenzhen, Dongguan, Guangzhou, Foshan, Zhuhai area regularly (China’s manufacturing heartland). I see more empty factories with each passing month. I visit more suppliers who are operating at 50%, 40% and even 30% operating capacity (when at this time of the year they should be squeezing out more than 100%). I was at a factory last week where over 60% of the workforce has been let go with those remaining – whilst occupied – are by no means working hard (many are being kept on just in case there is a last minute rush of orders). These are not pathetic factories that should have died years ago; some of these are among the best managed factories in the region.
I have been hearing many factories talking about how the government will step in to prop them up if things get worse. With 15 million-plus migrant workers in the Pearl Rive Delta alone, the government better have something up its sleeve, because not very many of them have any intention of going home.
Perhaps they could all come to Hong Kong and work in the booming tourist industry.
This is a continuation of the problem of hundreds of thousands of empty apartments with more continuing to be built. It’s a house of cards and when it falls, it will land on us.
DavidLeyonhjelm
11 Sep 12 at 5:15 pm
a witty, sarcastic, whip-tail at the end.
dd
11 Sep 12 at 5:22 pm
The last visit to Taiwan earlier in the year saw almost clear skies as the perpetual smog haze was no longer spewing across the straights from the mainland. This was not the case 2, 4 or 6 years ago.
Token
11 Sep 12 at 5:24 pm
China is a disaster waiting to happen.
Jarrah
11 Sep 12 at 6:32 pm
Now’s the time to adjust the portfolio campers.
The ChiCronyComs get unemployment of scores of millions trouble then expect a war for the motherland….Taiwan sounds nice.
Alfonso
11 Sep 12 at 7:05 pm
The imminent change to a new generation of government has caused a reduction in expenditure. Accordingly, only a portion of budgets have been ‘spent’. The pickup in expenditure will occur as the new government settles in some time next year.
Uber
11 Sep 12 at 7:22 pm
I’m not buying all the negativity for China that i keep reading. I’m buying a slow down but not a cratering.
there are serious dynamics occurring there and most of it is good stuff. the move from the rural areas to the cities will continue.
And the stories about silent cities isn’t accurate from what I’ve read.
JC
11 Sep 12 at 7:28 pm
The 2.7% rise was in YOY terms. Exports appear to have fallen 3.3% sa in the month.
sdfc
11 Sep 12 at 7:29 pm
I’m buying it. But then again, I’ve been a China skeptic for some time – years, in fact – so that’s not exactly news.
It’s all set up wrong, JC. Too much state control, not enough market dynamics. There are no internal markets except for property, which is why there’s such a property bubble. The bureaucracy runs everything, which is fine if the bureaucracy is functioning well (and that sometimes happens), but as soon as you get the dry-rot of corruption and inertia and, well, bureaucracy, things deteriorate.
China’s success has been that it has been very external facing and therefore responsive to international markets. But that trick can’t work forever.
dd
11 Sep 12 at 9:26 pm
“China is a disaster waiting to happen”
Jarrah, it already has happened to a significant extent, people just haven’t got the message yet. Wait for what’s yet to come. Wayne Swan should be fashioning his personal noose after betting the Australian farm on China. Preferably, someone should be fashioning it for him, and a matching one for the recently-bereaved lying slapper. These people have debased Australia from the heights of the parliament down to the last smallest child in this country whose future is blown by a shameless bunch of economic wastrels.
mareeS
11 Sep 12 at 10:19 pm
Post-Mao China is an example of the best functioning bureaucracy I have ever heard of. To the extent that I never thought possible. Of course nothing is perfect.
Having said that, the current bubble seems to be at least in part a by product of this bureaucracy. It would be interesting to watch whether it is a bigger bubble (and burst) than in the US.
Boris
11 Sep 12 at 11:55 pm
During the early days of the GFC and beyond, I lived in Beijing and commuted to and from nearby Hebei province on workdays. An uncountable number of factories in that province and the surrounding regions – which together constitute one of the major three industrial heartlands in China – were shuttered. Yet somehow the Chinese economy grew at 8.01% that year. Well, of course it did. The Chinese government said it would, so it did, because the economy does what the Chinese government tells it to – simple as that. “Defend 8″, was the propaganda slogan.
Lies, damn lies and Chinese economic statistics.
I’ve been bearish on the Chinese economy for years, and I have to admit that I’m surprised they’ve been able to keep it going for this long, but I’m really starting to think that the end is nigh. The confidence trick that is China Inc can’t last much longer, and boy are we in for it when the rest of the world wises up to the dirty little secrets that underpin the Chinese economic miracle.
And us in Australia? We are boned.
Oh come on
12 Sep 12 at 2:11 am
JC: when you’ve got investment running at 50$ of GDP, something’s wrong. Deeply, deeply wrong.
In Beijing – so many glittering skyscrapers going up, even though there’s a glut of vacant office space. By the time I’d left, there were dozens of fancy high-end shopping malls designed by internationally renowned architects throughout the capital – with almost no customers strolling through to buy the high-end goods being sold there. Ghost towns. The vast majority of Chinese – even Beijing, Shanghai and Guangzhou and Shenzhen, and even the middle-upper classes – shop in markets.
There are a lot of high rollers in China, that’s true. But the thing is that to mark yourself out as a high roller (and this is an absolute necessity for many), you need to build some kind of edifice as mentioned above. An office tower, a shopping mall, something to show your greatness. Build it and they will come, right? Ummm….
Something is deeply, deeply wrong with the Chinese economy. You don’t have to scratch the surface very deeply to see it.
Oh come on
12 Sep 12 at 2:21 am
50%, that should be
Oh come on
12 Sep 12 at 2:21 am
Oh Come On and others,
I also have listened to doomsayers on China being wrong for a decade or more. Contrary to the view that high investment is a burden, it is in my view the best reason why China will not fall on its face. That investment is fundamentally market driven.
It was the Japanese governments decision to divert savings away from productive investment in the late 1970s that heralded the end of the previous economic miracle. Though China has problems with corruption and over-large government influence, it still has a capability of continued high growth on the back of its investment and savings and it’s surplus rural labour.
If i am wrong then it is a paradigm shift for me!
Alan Moran
12 Sep 12 at 3:11 am
You think that investment totally 50% of GDP (funds probably sourced by loans unlikely to be paid) is healthy? You think chronic overcapacity in all sectors of the economy is healthy? You call people with access to capital (or lines of credit) making investment decisions based at very least partially on face and ego “market driven”?
Ever been to China, Alan?
Oh come on
12 Sep 12 at 5:40 am
Alan: the doomsayers have been right. The reasons they’ve given have been correct. It’s just taking a little bit longer to play out than we thought, but the fundamentals are still there. There’s an awful lot of ruin in a nation, particularly when the savings rate is 20% and there are few other options to do with your excess cash than stick it in a deposit account.
Seriously, though, if we’re wrong and you’re right, you and I both need to give up on this whole free enterprise system and embrace state-managed capitalism. If China’s right, then we’re wrong. If you’re right, then there is a better way. Sure you want to go down that path?
Oh come on
12 Sep 12 at 5:45 am
Starting to sound a little bit like GW predictions. We’ve been predicting this the whole time, it hasn’t happened yet but it will happen… eventually… trust me.
Seriously, I think the export orientated parts of their economy will tank if the markets in Europe and America stay flatlined but they still have one hell of a market both internally (due to their large population) and in Asia (due to their also booming neighbours).
Combine Dave
12 Sep 12 at 7:05 am
China has a very large domestic market and plenty of wealthy neighbours in the Asian region to trade.
So while the continued failures of Europe and America will hurt the Chinese economy I don’t predict a complete collaspe.
http://seattletimes.com/html/nationworld/2004136985_webasiarecessionwatch21.html
Combine Dave
12 Sep 12 at 7:21 am
OCO
Yep been to China. Nope don’t think the capitalism is state managed. Yep, don’t see anything wrong with people saving rather than consuming and note that this is normally the key to future prosperity.
The End may well be Nigh but it has been so for two decades now
Alan Moran
12 Sep 12 at 8:04 am
I can’t speak for the pre GFC period but post GFC I have followed Jim Chanos on China very closely and it has been almost eerie how prescient he has been. He appears on TV/youtube very often usually with critics telling him why he is wrong and China will continue to grow off into the wild blue yonder. Everytime he politely destroys their logic( more like wishful thinking) and the market has been making him ever richer since. God knows how much he has made off shorting FMG over the last 2 months.
I think the best the Chinese Govt can do is go for a double or nothing now and do yet another hopelessly wasteful stimulus package and kick the can down the road a bit further but there is just so much surplus capapcity in so many industries already that I think maybe there is only one kick of the can left… perhaps
kingsley
12 Sep 12 at 8:57 am
I’m pretty sure they won’t be throwing further good money after bad aka EU style.
Cory Olsen
12 Sep 12 at 2:26 pm
Good grief, don’t you lot understand leveraging into productivity? That’s economics 101, and it’s how growth occurs. That’s what China has beein doing.
Strewth, none of that has anything to do with government spending that decreases productivity to prop up the under-productive and over-geared.
Uber
12 Sep 12 at 7:17 pm
Oh my, Uber ….. you trade nothing on your own account , do you Champ? Skin in the game will “modify” your theoretical involvement.
Hee, hee.
Alfonso
12 Sep 12 at 8:27 pm
Got any real arguments there Alfonso? I wish I was more like you and could come up with such clever insults.
Uber
12 Sep 12 at 9:18 pm
Thanks, Steve, for highlighting my comment. Thanks to all of you who responded. I enjoyed reading your thoughts.
The first thing I should say is that I have my own business in China and the last thing I want to see is the economy “cratering” (as one commenter put it). I am not a China basher for the sake of illustrating some broader ideological agenda; I’m just a businessman trying to make financial decisions based on what I see every day. And to be honest it’s not easy to tell which way things are going at the moment.
I will just respond to one commenter – Alan – who wrote: “Though China has problems with corruption and over-large government influence, it still has a capability of continued high growth on the back of its investment and savings and its surplus rural labour”.
Alan, one of the things that has really surprised me over the last ten years is how that surplus rural labour has been absent from factories. What I mean is that many factories are struggling to find workers. It’s not unusual for me to be in factories crying out for 20-50% more workers but unable to get them. Talk to any factory owner; they’ll tell you the same thing. Getting workers is very difficult, which is partly the reason why wages have doubled in the last ten years (they will double, BTW, every five years from now on at the government’s behest).
I can’t say what this will mean for the bigger and longer-term picture (your “paradigm shift”). I’m not an economist, and I really can’t say anything about that. I honestly hope China can avert a significant decline in economic growth, and not just for my own livelihood. But I have been running my own business in manufacturing in southern China for more than 20 years. And I have never had much truck with the doom and gloom merchants. But now I feel things are different.
Then again, perhaps I’m just getting older and it’s time to retire…
Hanyu
12 Sep 12 at 10:19 pm