Article

2005-08-01 China-Japan-Koreas

China's Economy May be in a Controlled Slowdown

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Posted by mhw 2005-08-01 08:55|| || Front Page|| [2 views since 2007-05-07] Top

#1 Busts follow booms. Its an iron rule of economics. A Chinese economic bust will be severe, but relatively short, absent other factors.

Posted by phil_b 2005-08-01 09:11|| 2005-08-01 09:11|| Front Page Top

#2 The question that remains to be answered is this: How real is the Chinese economy? What part of the various numbers can we trust?

If China is a Ponzi scheme, as I maintain, any slowing of the economy causes collapse. If China is a struggling yet developing First World economy, then they have a recession with some benefits to prices world-wide.

I just don't find it believable that China can be an economic success and still have 80% of its population living in Third World conditions. The nation doesn't have enough water, enough electricity, enough raw materials and way too many people.

Posted by Chuck Simmins">Chuck Simmins 2005-08-01 10:15|| http://blog.simmins.org]">[http://blog.simmins.org] 2005-08-01 10:15|| Front Page Top

#3 I still think the Chinese are trying to prevent complete collapse. They are in debt up to their eyeballs, 60% at least of bank loans are bad, growing discontent from the country-bumpkins, shrinking GDP while having a growing military budget....sounds like a Soviet Union type collapse in the making.

Posted by mmurray821 2005-08-01 10:41|| 2005-08-01 10:41|| Front Page Top

#4 This has the air of a thousand economists claiming "I saw it years ago!" Once it's all over, that is.

Posted by Laurence of the Rats">Laurence of the Rats 2005-08-01 10:44|| http://www.punictreachery.com/]">[http://www.punictreachery.com/] 2005-08-01 10:44|| Front Page Top

#5 This has been years in the planning. Not just from the Chinese gnomes, but from the EU's, the US's, and every serious economic player in the world. All of them, united, put on a dog & pony show for the real government in China of *exactly* what was going to happen under a dozen different economic scenarios. The end result is that what is happening now is as carefully scripted as an operatic ballet. N.B.: the Chinese have long had the nickname "The Jews of the Orient", not in a deragatory sense, but in respect to their aptitude with economics and finance, apart from that silly glitch known as Marxism.

Posted by Anonymoose 2005-08-01 10:55|| 2005-08-01 10:55|| Front Page Top

#6 moose, one of the errors in perception that I believe many pundits make is to assume that the technocrats are in charge in China. The reality may be very different. China has been behaving as if the world economy has no influence on its internal economy, and that the world must come to China in the end. Neither is true, and I suspect the reality is that the "Middle Kingdom" oligarchs are the ones in charge. Not a good thing for China.

Posted by Chuck Simmins">Chuck Simmins 2005-08-01 11:23|| http://blog.simmins.org]">[http://blog.simmins.org] 2005-08-01 11:23|| Front Page Top

#7 Of course their economy is cooling. After all, I just cancelled my order for 3 million Napolean Dynamite bobbble head dolls. Gosh!

Posted by Zpaz 2005-08-01 11:31|| 2005-08-01 11:31|| Front Page Top

#8 CS: The question that remains to be answered is this: How real is the Chinese economy? What part of the various numbers can we trust?

As real as the physical plant springing up all over its boomtowns bearing names like Siemens, Nokia, etc. As real as the shoe and textile factories that supply products to Nike, Adidas, Ralph Lauren, JC Penney, etc. As real as the furniture factories that supply first-rate leather and other furniture for a fraction of the price of a La-Z-Boy.

CS: If China is a Ponzi scheme, as I maintain, any slowing of the economy causes collapse. If China is a struggling yet developing First World economy, then they have a recession with some benefits to prices world-wide.

A Ponzi scheme is one where people put in money that is then squandered by the organizer of the scheme on expensive baubles. Asian and Western investors with decades of experience in light and heavy manufacturing are putting up plants in China to pump out products at the fraction of the cost they would incur elsewhere. This is not a Ponzi scheme - low input costs will attract investment. Why do you think Detroit is a shell of its former self, and auto plants in lower cost areas like Ohio and Alabama are thriving?

CS: I just don't find it believable that China can be an economic success and still have 80% of its population living in Third World conditions.

China is an economic success *relative* to the basket cases of the world. It is a success only in the limited sense that its economy is growing faster than most countries around the world. The reason it is growing so rapidly is because most of its population is desperately poor due to underemployment - this makes their labor extremely cheap. The average peasant makes as little as $25 a month. In China's industrial boomtowns, he gets to double his salary to $50 - and in many cases, he can quadruple it to $100 a month, if he learns a trade.

But this gap is exactly why the vast majority of the peasants will remain quiescent - they have a well-defined path to prosperity. The real danger to China's rulers doesn't come from the peasants - it comes from urban dwellers who are losing their jobs, pensions, housing and free health care, as China's state-owned companies are privatized, one after another.

CS: The nation doesn't have enough water, enough electricity, enough raw materials and way too many people.

Saudi Arabia doesn't have enough water. (But it gets by using reverse osmosis water plants). China has no lack of water. The seasonal floods that displace millions and kill thousands are ample evidence of this fact. The problem is that a lot of it is either wasted or not collected.

The electricity issue is related to rapid economic growth and subsidies. Without rapid economic growth, power demand wouldn't be a problem. Without subsidies, power supply wouldn't be a problem.

And raw materials really aren't an issue. The East Asian countries that industrialized in the 70's, 80's and 90's imported most of their raw materials. Most of those countries did not grow cotton but were major textile exporters. Most of those countries grew little in the way of pigs or cattle, but were major leather products exporters. The raw materials issues that the Chinese government is always on about relate to wartime-related supply lines - anything imported from abroad is vulnerable - in a fight with Uncle Sam.

As to too many people, that's the silliest thing I've ever heard. Population is a strength, not a weakness. The reason China was always a major economic, cultural and technological colossus in the past was because of its immense population. Communism turned a strength into a weakness in China, just socialism did the same to India. The US is a major economic and military power because it has a population of close to 300m. If the US population was 3m, American influence would be similar to Belgium's.

Another overlooked aspect is that China has among the lowest population densities in East Asia. China's is 140 per sq km, whereas Japan's, Korea's and Taiwan's are 339, 493 and 696 per sq km respectively - a difference that doesn't even take into account the fact that most of China is relatively flat, whereas most of Japan, Korea and Taiwan are relatively hilly. Overpopulation isn't the reason for China's backwardness - decades of communist economic policies are.

Posted by Zhang Fei">Zhang Fei 2005-08-01 12:00|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2005-08-01 12:00|| Front Page Top

#9 Zhang Fei wrote:

A Ponzi scheme is one where people put in money that is then squandered by the organizer of the scheme on expensive baubles. Asian and Western investors with decades of experience in light and heavy manufacturing are putting up plants in China to pump out products at the fraction of the cost they would incur elsewhere. This is not a Ponzi scheme - low input costs will attract investment. Why do you think Detroit is a shell of its former self, and auto plants in lower cost areas like Ohio and Alabama are thriving?

The question then arises about where the lower input costs are coming from. I keep hearing stuff like "such and such a plant in China's going to be able to undercut everyone else because it has much lower steel costs than everywhere else" and I wonder how it makes sense given that China imports large amounts of steel on the international market and should be paying the same price that everyone else does.

The only way the steel itself could be cheaper is if the government's subsidizing it or otherwise manipulating the price.

What I _suspect_ happened is that they gained a foothold in the semi-disposable-electronics department thanks to much more lax environmental regulations than here (i.e. they don't strongly enforce any of the laws against CFC-based circuit board cleaning agents) and they borrowed heavily against it to subsidize their entries into a large number of industries (like hand tools).

I can assure you that the electronics (motherboards, for instance) and hand tools I've seen coming out of China are very often of substandard quality. We wound up buying, a couple years back, some extra-cheap allen and torx wrenches from Harbor Freight that were made in China and in the end turned out to be much more expensive than buying similar tools from Sears... it turned out they were made from anodized aluminum, and not phosphated steel...

(And don't get me started about the memory I got last month, stamped "Made in China," just like the motherboard it wouldn't fit into...)

Posted by Phil Fraering 2005-08-01 13:10|| http://newsfromthefridge.typepad.com]">[http://newsfromthefridge.typepad.com] 2005-08-01 13:10|| Front Page Top

#10 PF: The question then arises about where the lower input costs are coming from. I keep hearing stuff like "such and such a plant in China's going to be able to undercut everyone else because it has much lower steel costs than everywhere else" and I wonder how it makes sense given that China imports large amounts of steel on the international market and should be paying the same price that everyone else does.

Could be because the journalist who reported the story (and his source) don't know what he's talking about. Apart from factual announcements (or acquisitions, bankruptcies, etc), a lot financial news opinion is worth what you paid for it - $1. After all, they're written and researched by journalists, who really don't know anything from anything - if they did, they'd be doing, not reporting.

The reason China has lower costs for a lot of stuff is because of cheap land and cheap labor. The fact that you can't find an explanation for why China has lower costs indicates not that China's cost advantage is inexplicable, but that you may not know enough about the history of how lower costs have been the basis of East Asia's industrialization in the post-WWII era. China is not the first country in East Asia to have made products based on flat-rolled steel or to have imported substantial amounts of steel at world prices to feed domestic demand. South Korea, Taiwan, Japan, and much of East Asia all preceded China. This is how they industrialized - by moving up the ladder in industry after industry.

Posted by Zhang Fei">Zhang Fei 2005-08-01 13:40|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2005-08-01 13:40|| Front Page Top

#11 PF: What I _suspect_ happened is that they gained a foothold in the semi-disposable-electronics department thanks to much more lax environmental regulations than here (i.e. they don't strongly enforce any of the laws against CFC-based circuit board cleaning agents) and they borrowed heavily against it to subsidize their entries into a large number of industries (like hand tools).

Lax environmental regulations might be part of it, but the major factor is the fact that electronics goods manufactured in small runs require a lot of manual assembly. And manual assembly in China costs $0.50 an hour for top quality labor, in comparison to $15 an hour (including bennies) in a bottom of the barrel assembly plant in New Jersey.

PF: I can assure you that the electronics (motherboards, for instance) and hand tools I've seen coming out of China are very often of substandard quality. We wound up buying, a couple years back, some extra-cheap allen and torx wrenches from Harbor Freight that were made in China and in the end turned out to be much more expensive than buying similar tools from Sears... it turned out they were made from anodized aluminum, and not phosphated steel...

The motherboards (and most other products) coming out of China are not made by Chinese manufacturers - they're made by foreign manufacturers with plants in China. Motherboards in particular are dominated by Taiwanese and South Korean manufacturers. The reason you got cheap crap was because you decided to buy based on price. The Craftsman tools you got from Sears are probably also made in China (typically by a foreign company), but Sears paid up, and got a better product. Even with Chinese-made goods, you get what you pay for - the domestic firms have lower prices, but the foreign firms have better quality control. But even the foreign firms will compete based on price when they have to, leaving quality control inspection in the hands of the consumer.

PF: (And don't get me started about the memory I got last month, stamped "Made in China," just like the motherboard it wouldn't fit into...)

I have bought memory assembled in all kinds of places - Taiwan, Japan, China, South Korea, Malaysia, the Philippines, etc. The only instances when I've had issues is when I bought generic memory - whether it was made in Japan, Korea, Taiwan or China. When you buy generic memory, you are buying the rejects - the items that did not pass quality control consistently.

Give me the name of your motherboard manufacturer, and I'll tell you its country of origin - I bet it wasn't even a Chinese company, most of which aren't sophisticated enough to manufacture motherboards. In fact, I don't know of a single Chinese manufacturer of motherboards. All of them are foreign transplants where the entire physical plant was moved to China.

Posted by Zhang Fei">Zhang Fei 2005-08-01 14:00|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2005-08-01 14:00|| Front Page Top

#12 but it was still the third-weakest reading since the index was launched in April 2004.

Now there's a statistic, it's an emerging economy all right. :>

Posted by Shipman 2005-08-01 14:46|| 2005-08-01 14:46|| Front Page Top

#13 Article: An index based on a separate survey of purchasing managers conducted for the National Bureau of Statistics painted a less rosy picture. The index fell for the fourth straight month in July, to 51.1 from 51.7 in June.

Here are the equivalent stats for the US since 1948.

Posted by Zhang Fei">Zhang Fei 2005-08-01 14:53|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2005-08-01 14:53|| Front Page Top

#14 I can't imagine that excess Chinese population will be as much of a problem starting about a decade on. I don't want to even think about how many blood donors will be dying of AIDS (entire villages all at once, from the mixed plasma that was reinjected into their veins), SARS, the new Pig Flu/Ebola thingy that's already killed at least 34 people... all those aborted baby girls who won't be mothering their fair share of the next generation. And if China is foolish enough to try to invade Taiwan or India, they could lose masses of young men in only a few days, taking even more pressure off the economy.

Posted by trailing wife 2005-08-01 15:52|| 2005-08-01 15:52|| Front Page Top

#15 TW: I can't imagine that excess Chinese population will be as much of a problem starting about a decade on.

China will have a huge population for a while yet. I think the one-child policy is a stopgap to ease the pressure from the wreckage of 30+ years of communist economic policies. Ordinary Chinese are having more than one child. They're just hiding it from the authorities, some of whom are bribed into ignoring it.

TW: I don't want to even think about how many blood donors will be dying of AIDS (entire villages all at once, from the mixed plasma that was reinjected into their veins), SARS, the new Pig Flu/Ebola thingy that's already killed at least 34 people...

All exaggerated. I think some NGO's came up with the statistic that half of all Africans were infected with AIDS. I'm still waiting for the big die-off. China has some real issues with accountability over disease control, but the basic habits of soap and water inculcated among schoolchildren have ensured that there will be no big pandemics emerging from China.

TW: all those aborted baby girls who won't be mothering their fair share of the next generation.

Actually, China has dealt with huge shortages of women for millenia. The old problem was that women would die in childbirth. This is why the bride price was invented, whereby the groom's family had to pay the bride's family a significant sum of money for the bride's hand. In the old days, wealthy men had as many concubines as they wanted, and poor men did without, or paid for the company of women, as they do today.

TW: And if China is foolish enough to try to invade Taiwan or India, they could lose masses of young men in only a few days, taking even more pressure off the economy.

If China was looking to lose masses of men, it wouldn't be spending all this money on research and development and buying cutting edge American technology from our *ally* Israel and building modern warships. They'd send their people over on fishing boats to Taiwan. Note that the last time the Communists fought the Nationalists - it was the Nationalists, not the Communists, who ended up retreating to Taiwan. And the last time China fought the Indians, let's just say that a significant chunk of Indian land ended up in Chinese hands - this at a time when the Chinese were significantly under-equipped compared to the Indians.

Posted by Zhang Fei">Zhang Fei 2005-08-01 16:27|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2005-08-01 16:27|| Front Page Top

#16 "I think some NGO's came up with the statistic that half of all Africans were infected with AIDS. I'm still waiting for the big die-off. "

Ive never seen that claim. Its that about a third of adults in a few southern african countries, like Botswana, are infected. And yes, the death rates in those countries have increased (dont forget, in a country where the normal life expectany is in the 40's catching a fatal disease when youre 30 that takes upto a decade to kill you wont increase the death rate all THAT dramatically.

Posted by Liberalhawk 2005-08-01 16:57|| 2005-08-01 16:57|| Front Page Top

#17 In the last 3 months China has become a substantial net exporter of steel. This has been cited as evidence of a sharp slowdown in their economy. It could equally well be evidence that they overbuilt plant. Overbuilding is the reason busts follow booms.

Posted by phil_b 2005-08-01 17:37|| 2005-08-01 17:37|| Front Page Top

#18 phil_b: In the last 3 months China has become a substantial net exporter of steel.

If that's true, supply has finally caught up with demand. I would sell coal stocks - at least of the kind used for steel. Retailers are also about to see *declines* in the cost of goods made with steel. Now I understand why Chinese steel companies were looking for substantial discounts on iron ore from Rio Tinto - the party's coming to an end, at least until the high-cost players get weeded out. This may mean a lot of non-Chinese companies in the steel industry, including the Japanese and US producers.

Posted by Zhang Fei">Zhang Fei 2005-08-01 17:50|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com] 2005-08-01 17:50|| Front Page Top

#19 China's net export of steel totals 2.29 million tons in first half year

BTW Zhang, the next pandemic will come out of China and it will be substantially the CPC's fault.

Posted by phil_b 2005-08-01 18:18|| 2005-08-01 18:18|| Front Page Top

#20 Zhang, that analysis is why people go to you want they want an expert's opinion, instead of to me. ;-)

Posted by trailing wife 2005-08-01 18:34|| 2005-08-01 18:34|| Front Page Top

#21

Could be because the journalist who reported the story (and his source) don't know what he's talking about. Apart from factual announcements (or acquisitions, bankruptcies, etc), a lot financial news opinion is worth what you paid for it - $1. After all, they're written and researched by journalists, who really don't know anything from anything - if they did, they'd be doing, not reporting.

Zhang, this was not something I heard from a journalist, but from someone doing business in the country. I can't really talk about it any more. Have a nice day!

Posted by Phil Fraering 2005-08-01 21:44|| 2005-08-01 21:44|| Front Page Top

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