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The U.S. meekly acknowledged the recession only on Dec. 8, last year, at a time when the financial crisis had already hit consumers and businesses. Now, nothing is selling locally, which includes houses, cars, merchandise, luxury holidays, travel, except food items.
The U.S., Canada and the European economies have been tied together since the last five generations and will swim or sink together weathering the economic storm. Likewise, countries like Japan, South Korea and Taiwan, tied into the developed world for the last fifty years will also be badly hit. But China, which emerged in the last 20 years, will be impacted the most as consumer demand for its exports is in sharp decline.
China priding as the factory of the world was toasting last month on being the world’s third largest economy. However, its statistics are questionable and there is no end to its self-praise and sycophancy.
Western observers usually pick economic data from China’s official websites and call it gospel, ignoring the fact that huge unsold inventories of finished goods lie piled up in warehouses in China, Europe and the U.S. It is already depression time in China’s prosperous eastern seaboard. Shipping indices including the Baltic Dry Index, which measure the movement of trade and goods have slumped.
Let us look at a few known facts. China exports 64 percent of its gross national product to the world, mostly to Europe, United States and Japan. If these countries are in a serious recession bordering depression, how can China escape its consequences?
China is also merrily telling the world that they have an economic package totaling US$586 billion to stimulate their economy. As a matter of fact, this is not new money, but mostly already committed aid, which has been summed up to make it look grand.
It will be a great miracle if the Chinese economy does not shrink in 2009. One should discount the fat statistics provided by China, as conventional wisdom is that the Chinese economy probably did not grow at all in 2008 and will contract in 2009.
According to independent observers, China’s explosive growth rate as reported previously by the government and faithfully copied by the rest of the world’s media is a farce. This is because:
a) A healthy growth rate of 8 percent in any other country of the world is a gloom doom in China. At that rate China will suffer the worst of the world recession, as demand for jobs will firmly outpace creation. At 8 percent growth, the Chinese economy will create 8 million jobs. But from previous statistics we know that requirement is 24 million. This mismatch is recipe for social unrest.
b) A recent incident in Dongguan, where workers refused to accept the closure of their factory and instead accepted 60 percent welfare payment in lieu, snowballed into a riot. The forgoing repeated at the giant factory, which makes toys for American Mattel, Hosbro and others. American demand has dried up and China’s factory owners have no choice but to close shutters.
c) China is suffering the same malice of rise in labor costs like the rest of the world. Chinese labor costs have risen by 70 to 100 percent in the last three years without corresponding rise in product prices, which is a big dent in their profit margins. Soon a majority of factories will be forced to shut down or money from the government’s bailout package of US$586 billion will have to be paid to angry workers.
d) The appreciation of the Yuan by as much as 7-9 percent a year has further impacted profit margins. If prices of finished products do not rise, which is unlikely to happen due to the deep recession in the West, factories will be forced to close down.
No economy, irrespective of its strength, can withstand the negative impact of the above factors. Economic history of the world is full of examples where excessive expansion based on exports and disregard to internal consumption ended up in sorrow. In the late 1990s, Asia’s so-called Tiger economies suffered a similar fate. They borrowed and built too much and too fast on exports and had to be bailed out by the International Monetary Fund. China is in that position today.
China’s US$586 billion economic stimulus package is trying hard to transfer some goods stockpiled in warehouses to internal consumption. This may or may not work as internal expenditures usually take two to three quarters before their impact is felt.
The U.S. government’s US$700 billion aid to revive their economy, since last October, has had little impact. The additional trillion-dollar aid planned by the new president will take at least three to four quarters before its impact is felt. The same is true for the Chinese economy.
What will happen when China and the rest of the world end the recession? It is unlikely that economic and manufacturing structure of the world will remain the same. The U.S. will emerge wiser with Wall Street excesses completely tamed. Besides, it will move some of the manufacturing back to the U.S. and boost jobs and control its imports and exports. It may take between 2 and 4 years for this strategy to work. President Barack Obama may get re-elected for a second term based on how he fares re-jigging the American economy.
China will no longer have double-digit growth rates like it did in the past five years but may show a more reasonable 8 percent growth. It will no longer be the world’s lowest cost manufacturer, as that crown will go to other nations in the region.
But China may still emerge as a highly competitive manufacturing base as it has already mastered the art of mass production. They will compete with the developed world on prices, profit margins, product development, labor laws, environmental controls and human rights.
It could also signal an end to the Communist Party’s complete domination of Chinese society. The West, which from 1950 till 1990 was so concerned about human rights abuses in China and then forgot about them in the past two decades, will encourage political dissent. There are already fun filled reports of irate citizens challenging a court official to a duel, ink filled eggs thrown at Party officials, and labor activists putting the spotlight on social issues.
The economic downturn has pushed up the crime rate in China. Officials of the Chinese Communist Party are concerned about minor protests, as the specter of Tiananmen Square protests of 1989 still haunts them. So, present day protests are quickly stamped as minor social and law and orders issues.
In summary, China is in for a rude shock. The deep recession in the West will stay for the next four to six quarters. China will learn the hard way that exclusive focus on exports has a price.
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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)
