The Chinese economy is slowing down. Is it Good or Bad?
The first quarter of 2012 has passed, and Chinese economic growth remains stagnant. Let’s review three points that Business Tianjin identified as critical measures of Chinese economic health for the first half of 2012.
1. Chinese growth - is it sustainable in the midst of global slowdown?
At the annual meeting of the National People’s Congress (NPC), Premier Wen Jiabao set a growth target of just 7.5% for 2012. That is half a percentage point lower than the target set in the previous seven years. It is also below the 8% threshold deemed necessary to preserve social stability as noted by The Economist magazine.
Although China has usually been surpassing its growth target, this news was received badly by the region’s stock markets that rely heavily on China for exports. Commodities-rich countries, like Australia, export various kinds of raw materials from coal to steel and copper that are vital to China’s infrastructure construction.
By setting a lower target, Beijing hopes to achieve two things. First, is to move away from capital-intensive kinds of manufacturing while increasing labour-intensive kinds and promoting the services industry. Balanced growth of less than 8% would raise employment, wages, and private consumption faster than unbalanced growth of much more than 8%, says Nicholas Lardy of Peterson Institute for International economics. Second, is that Beijing will encourage private investments in many parts of the economy rather than focusing its support on state-owned enterprises (SOEs). SOEs were great tools for China to achieve high speed growth in certain industries. A shift to less capital-intensive growth, if it were to happen, would be bad news for commodity exporters like Australia and good news for China’s neglected services industries, predicts The Economist.
2. Chinese real estate in free fall and likelihood of economic hard-landing?
Despite Beijing’s effort to ease monetary and fiscal policy to bolster economic growth, it will continue to maintain its real estate curbs throughout the year. Beijing will ensure purchases of first homes are unaffected according to the official China Securities Journal, even as property sales fell 20.9% in the first two months of 2012 from a year earlier. Beijing introduced a series of measures, including property sales taxes, and lending restrictions to curb real estate speculation.
3. People’s Bank of China eases monetary environment but by how much?
In January, the latest figure on Beijing’s lending and money supply growth exceeded economists’ estimates and the market interpreted it as Beijing signaling an easing of monetary conditions.
China's new CNY loans fell below market expectation in February, reflecting a weakening demand for credit amid slower economic growth. Global market participants are paying close attention to the lending data that could show how significantly Beijing is easing its monetary policy to support a cooling economy according to the Wall Street Journal.
China's broadest measure of money supply, M2, was up 13.0% at the end of February from a year earlier."This could be the result of less demand for credit as well as continued government controls over bank lending," said CICC economist Zhu Weijia. "Overall, looking forward, the government needs to undertake more substantial policy loosening," he said.
Many economic indicators such as industrial output and low inflation in the first two months of the year will help Beijing loosen its monetary policy. CICC's Zhu said he expected the PBOC to cut banks' reserve requirement ratio two to three times this year to boost lending and stimulate economic growth. Bank lending is likely to rebound in the coming months, he said.
In January, new loans by the nation's financial institutions were down 29% from the same month a year earlier, and stood at the lowest level for the first month of the year since 2007 according to Wall Street Journal.
China’s government has done a terrific job in controlling inflation, Stephen Roach, former Non-Executive Chairman for Morgan Stanley in Asia and previously the bank’s Chief Economist, said at a conference in Shanghai on Thursday 08 March. Concerns that China will have a so-called hard landing are “vastly overblown” even as economic growth becomes more unbalanced, Roach said.
Even so, “they need to focus more on the downside risk” to growth, Qu Hongbin, Co-Head of Asian Economics Research at HSBC Holdings Plc in Hong Kong, said in a Bloomberg Television interview. “They need to react to those data and I think they will,” he said, also predicting the central bank will lower banks’ required reserve ratios at least twice by the end of June.
When China is not cheap anymore, what’s next?
“It’s not cheap like it used to be,” laments Dale Weathington of Kolcraft, an American firm that uses contract manufacturers to make prams in southern China. Labour costs have surged by 20% a year for the past four years, he grumbles.
In March, The Economist published a report on the issue of rising labour cost in China. Not only that labour costs are rising throughout China, the coastal provinces find it increasingly more difficult to lure workers away from inland provinces. Migrant workers often go home during the Chinese New Year break. In previous years 95% of Mr Weathington’s staff returned. This year only 85% did.
Joerg Wuttke, a veteran industrialist with the EU Chamber of Commerce in China, predicts that the cost to manufacture in China could soar twofold or even threefold by 2020. AlixPartners, a consultancy, offers this intriguing extrapolation in The Economist report: if China’s currency and shipping costs were to rise by 5% annually and wages were to go up by 30% a year, by 2015 it would be just as cheap to make things in North America as to make them in China and ship them there.
The trend is clear and these two questions are relevant to Business Tianjin readers. When China is no longer as cheap as it used to be, what will replace “the world’s factory? Will factories leave China to find cheaper labour?
Here are a few things that will likely happen in the next few years. Low tech and labour intensive industries have already left China and moved to other countries such as Sri Lanka where wages are 30-40% cheaper than China. Some firms have started to run a “China + 1” strategy, opening just one factory in another country to test the market and provide a contingency plan.
Unlike conventional thought, many factories find it difficult to move inland because the total cost saving ranges from 5 to 10% which is not enough to justify a big move. Infrastructure for export is still not as developed as coastal areas because shipping by river adds an extra week. Managers and other highly skilled staff often demand steep pay rises to move from sophisticated coastal cities to the inlands.
Industrialists will likely stay longer in China for the following reasons:
1. Reliable supply chain- China has become a one-stop shop. It has all the necessary suppliers of service.
Brian Noll of PPC, which makes connectors for televisions, says his firm seriously considered moving its operations to Vietnam. Labour was cheaper there, but Vietnam lacked reliable suppliers of services such as nickel plating, heat treatment, and special stamping. In the end, PPC decided not to leave China. Instead, it is automating more processes in its factory near Shanghai, replacing some workers with machines.
2. China is huge. Its labour pool is large and flexible enough to accommodate seasonal industries that make Christmas lights or toys, says Ivo Naumann of AlixPartners. In response to sudden demand, a Chinese factory making iPhones was able to rouse 8,000 workers from their dormitory and put them on the assembly line at midnight, according to the New York Times. Not the next day. Midnight. Nowhere else are such feats feasible.
3. The Chinese market is becoming the most important market for a vast number of companies. This has already overtaken the primary appeal of China as a cheap manufacturing base. No other country has so many new middle class consumers demanding new products.
Eventually though, other countries will catch up to China by building better roads, ports, and supply chains. They will compete with China’s coastal regions on basic manufacturing. China will have to move up the value chain fast enough to stay ahead of the curve. China will see much more innovation coming out of companies like Huawei and sea turtles (overseas Chinese coming back to China) contributing to innovative companies like Baidu.
China will undoubtedly become more expensive place to manufacture goods and to operate businesses. Foreign companies operating in China must re-assess their business strategy to align themselves with this trend. When China is no longer cheap, foreign businesses will have to keep innovating or they will not survive.
The first quarter of 2012 has passed, and Chinese economic growth remains stagnant. Let’s review three points that Business Tianjin identified as critical measures of Chinese economic health for the first half of 2012.
“It’s not cheap like it used to be,” laments Dale Weathington of Kolcraft, an American firm that uses contract manufacturers to make prams in southern China. Labour costs have surged by 20% a year for the past four years, he grumbles. 
