Economics

During the week I promised to blog a bit of how the financial crisis affects China. Below I have outlined some of my thoughts on this matter, but I have to make a disclaimer. This is a blog; I am not an economist; and this is just my two cents from where I am sitting.

First of all we have had a sort of a financial crisis her in China for almost a year. When the consumer prices started to soar during the autumn of 2007 and interest hikes and other measurers did not have any effect, the People’s Bank of China (central bank) took a rather drastic decision. In November they informed the banks that they were not allowed to increase their RMB assets for the rest of the year. In principle this was equal to banning the banks from lending money. I tell you that it was quite a dramatic period when the companies could not get hold of any money during the last days of the year.

The ban was, however, lifted beginning of the year, but a cap was set on how much a bank could increase there assets for 2008. The cap was set to 13% increase, which should be compared to an increase of 17% for the first 10 months in 2007. Quite a cut back actually.

Now this helped. The consumer price index has been on a steady down ward trend the whole year and is today hovering around 5%, which is acceptable to the Chinese government. However, the rather drastic measures also had an affect of the growth. The GDP growth the first quarter was 10.7%, but the second quarter the growth was down to 10.2%. 0.5% in just three months. If the trend would continue it would not take long until China would risk a hard landing of the economy (as per the World Bank that would mean a growth below 7%), something the Chinese authorities very skillfully has avoided over the years since Deng Xiao Ping in 1979 opened up the Chinese economy.

What was of course not counted for during the first part of the year was that 2008 we would see a severe global financial crisis. And that this also would/will have an effect on the corporate sector, on the export/import, the consumers etc.

When we now are reading about thousands and thousand of companies going bankrupt in China, I believe it not only to be related to the effects of the ongoing financial crisis. The bankruptcies seem to be within the smaller and medium sized enterprises. That is the same segment that was also hardest hit by the scarcity of money the first half of the year. When the global slowdown is now also crawling over the boarder in to China these companies have difficulties to endure, since they already are rather beaten up from not have had access to working capital since the beginning of the year.

The problem within the small/medium sized sector has also been recognized by the government. On October 9 the regulated RMB interest rates were reduced and the requirement on the smaller banks to place deposits with the central bank was also eased a bit. The aim, you could read in the papers, was to release money in to the system at a lower price so the small/medium sized companies would get access to working capital. It might have been a bit late though. In the English speaking paper Shanghai Daily you can today read that 1.200 companies have been shut down this year in the Zhejiang province (south of Shanghai). “The worst record in 10 years” according to the newspaper.

I am however a firm believer that China is not on its way down. There are several reasons for this belief
• The Chinese government has quite a number of tools in their tool box; interest rates are still on the high side, a currency reserve getting close to USD 2.000 billion. They also do not have to worry about an upcoming election and they have a rather good track record in managing the economy in difficult situations.
• The domestic market has also started to take off, meaning a less dependency on export over time.
• The Olympic Games is over, but now we have the World Expo here in Shanghai in 2010. There will be almost as much focus on this world expo as the Olympic Games. 180 countries have confirmed their participation in the expo.
• Growth is what makes China stable and the government will do their utmost to see to that China continues to grow.

China will of course be affected but the long term perspective for China is still, IMHO, looking very good.
But, if you are about to export goods to China now, it is recommended to try to mitigate the risks.

Hakan