Sunday, November 9, 2008

Chinese Stimulus Package

Yesterday the Chinese government announced it would spend nearly 600 billion USD in stimulus efforts. Morgan Stanley's Qing Wang and Steven Zhang gave us a heads up that this was coming here. They expected the announcement of a proactive stimulus policy to be made at the end of the month. Not only was it made earlier, but prior to the announcement, Chinese finance minister Xie Xuren was called back from Peru under what seem to be emergency circumstances. One partial explanation for the timing of the announcement is to frame the Chinese leadership in the best possible light heading into this Friday's G20 summit.
I think it's more likely that the Chinese government just caught on to the extent to which economic conditions have deteriorated domestically and realized they had to do something immediately. The amount to be spent is far larger than Zhang and Wang had anticipated although the announcement has been criticized for including infrastructure projects and earthquake recovery funds which were already to be spent. It had the effect of boosting Asian markets on Monday. Tokyo's benchmark stock index rose 5.8%, Shanghai's 7.3% and Hong Kong's 3.5%. The Yen also depreciated some which is interpreted to mean some are willing to make large investments financed by Japanese lenders.
I doubt these rallies will last as I don't think the markets had fully priced in the information that has spurred the Chinese government to action. Over the next few weeks, I think we'll see ever more stunning drops in exports and retail sales, rising unemployment and bankruptcies, and ultimately social unrest.
From Plastic News China; The twice-yearly China Import and Export Fair in Guangzhou is an important barometer of China's exports. The most recent fair, held earlier this month, witnessed a 10 percent drop in trade volume. According to the Xinhua Agency, orders from the U.S. posted the biggest decline: more than 30 percent from last year.
From the China law blog:The downturn in shipping is having a profoundly negative effect on all segments of China's maritime industry. Shipbuilders are finding that their shipbuilding contracts are being extensively breached. Since shipbuilders in China are mostly new companies, they are heavily in debt. These breaches threaten the life of the entire shipbuilding industry in China."

The Baltic Dry Index can be used as a stand-in for the amount of shipping occurring. From the chart you can see demand for exports has nosedived in the past few months.

Conditions have deteriorated so quickly that power generation in China actually fell in October:
'With more than 70 percent of electricity consumed by industrial users, economists track the power figures for an insight into the health of the manufacturing sector.
Sure enough, factories have moved down a gear in recent months, and economists polled by Reuters expect figures on Nov. 13 to show that industrial production growth slowed to a six-year low of 11.3 percent in the year to October.'

In a desperate attempt to avoid "mass incidents", local governments are stepping in to pay some of the wages owed by failed companies. From this chilling Washington Post article:

In the city of Dongguan, the local government handed out about $3.5 million on Oct. 21 to the employees of Smart Union -- which sold its toys to Mattel, Disney and Hasbro -- after the 7,000 workers staged a strike.

Hu Weicai, 38, who worked with the plastic molds used to make electronic toys, said employees became nervous when the owners slipped three months behind on salary payments. The workers occupied the factory and the surrounding streets until government officials promised them they would be paid.

"The government was very afraid when they saw what was happening. What the government fears most is workers making trouble. They paid us to stabilize our moods," Hu said. Indeed, signs posted at the gates of closed factories did not direct former workers to places where they could get help, but instead displayed a warning. In large black characters, they reminded workers that they could be detained for stirring up unrest, for disobeying security officials or even for 'unlawful gathering.'

The Chinese government cannot create demand which has suddenly disappeared. Furthermore, the current downturn is only a triggering event for the much larger correction which China would inevitably face, which is not dependent on external events, and which will be greatly exacerbated by China's own property market bubble bursting.
The Chinese consumer cannot save us. (But maybe the Japanese consumer can.)

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