Behind The Economic Headlines

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While Premier Wen Jiabao has targeted 8 percent growth for China in 2009, there are plenty of doubters. AP reports that the situation may be worse than official figures suggest:

    “Plunging exports. Factory closures. More than 20 million people thrown out of work. Official data showing that China’s economy is cooling but still growing strongly obscure what economists say is a sharp recent decline that has inflicted obvious pain.

    What is happening matters far beyond China. Whether the third-largest economy is stalling or still growing could affect how quickly the world recovers. A stagnant China would mean less demand for industrial materials and consumer goods from the United States and others.

    The difference lies in the way growth is measured. Beijing uses a method that compares growth in one quarter with a full year earlier and says its economy expanded by a healthy 6.8 percent in the final quarter of 2008.

    But experts say that compared to the previous three months — the system used by most other major countries — China’s growth fell to as low as 1 percent or possibly zero.”

    …A key indicator of manufacturing improved in January, suggesting the slump might be reaching its bottom. But the purchasing managers index of the China Federation of Logistics and Purchasing said manufacturing still contracted.

    “Despite the sunny headline figure, we believe it signals not a recovery, but rather continued weakness,” Standard Chartered economist Stephen Green said in a report. “Less bad news is not the same as good news.”

But the government is not sitting on its hands. Reuters has reported on the latest fiscal stimulus spending.

    “China is set to spend 130 billion yuan ($19 billion) in the second tranche of its stimulus package to boost demand in the faltering economy, state media reported on Tuesday.

    The 21st Century Business Herald, citing an unnamed source, gave the following breakdown of how the 130 billion yuan would be spent:

    — 28 billion yuan on affordable housing;

    — 31.5 billion yuan on public infrastructure, such as electricity, water and roads;

    — 17 billion yuan on health and education;

    — 11 billion yuan on environmental protection;

    — 15 billion yuan on economic restructuring (which often refers to upgrading technology and promoting consolidation in industrial sectors);

    — the remaining 27.5 billion yuan on unspecified major infrastructure projects.

    The National Development and Reform Commission, China’s top economic planner, will publish the spending details when it announces the second tranche, but confirmed that it would amount to 130 billion yuan, the official Xinhua news agency said.”

In addition, the countryside is getting a boost, according to Forbes:

    “China’s 750 million-strong farming population faces a tough 2009, the government warned on Sunday, vowing price support, land controls and curbs on imports to shore up flagging rural incomes and ward off unrest.

    …The recipe of rural policies will play an important part in China’s overall economic stimulus plans for this year.

    …China wants to tap rural spending potential to jolt economic growth out of the slowdown, and the Party worries that many millions of idle migrant workers made jobless by the slowdown could stoke protests and unrest.

    …More money will go to agricultural subsidies, including expanded support for soy and rapeseed varieties. Budget outlays and bond revenues will be “skewed” more to villages. More government earnings from farmland taken for commercial development will go to rural needs.

    Minimum purchase prices for cereals will rise. The government will increase reserve holdings of cereals, cotton, edible oils and pork.
    And in a step that could stir friction with othe
    r major agricultural nations, the document suggested the government may strengthen controls on some imports.”

Some lucky consumers have also had government coupons for spending, while farmers have been given subsidies on major domestic purchases.

There is no doubt that China is feeling the pain of the global slowdown, and that a lot of hope is being placed on domestic demand (rural as well as urban). It is also clear that the negative impact of the crisis is being felt more severely in some areas and industries (such as south China’s low-end manufacturing base) than in others (including fast-developing inland areas with less export exposure). As a result we read about the closure of thousands more toy factories, but also a new hope among some businesses that were hit by previous policies aimed at slowing the then overheating economy, and new money being poured into energy and infrastructure.

As ever with China, the headline figures hide a lot of detail, and businesses should ensure that they do appropriate research before jumping to conclusions that could have a big impact on strategic decision-making and future performance.

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