China’s Prime Minister Wen Jiabao, in a speech at the Beijing University of Aeronautics and Astronautics, singled out migrant workers and students as his biggest concern. One million students are out of a job, and 6.5 million more will graduate in about six months time.

Exports have decreased for the first time in seven years (-2.2 per cent). But, at the same time, imports have collapsed (-18 per cent) so that China’s November trade surplus (of USD 40 bn) is the highest of all time. This makes it impossible to depreciate the Chinese Yuan while remaining internationally responsible.

Even more shocking is the abruptness of the change. In October, exports were growing at a rate of 19 per cent year on year, while imports still increased over 15 per cent. It is as if someone had slammed on the trade breaks.

Deflation is Next

Exporters turning to the local market are cutting prices to compensate for the loss of their overseas business. Food and fuel prices are going down. With such news uncertainty is high and every company and everyone saves a bit more. The National Bureau of Statistics has announced it expects deflation (a negative consumer price index) by February, if not earlier.

If prices are going down, why not wait to buy more? This is the obvious decision that cost-conscious Chinese consumers will make, slowing down the economy further and pushing prices further down. Since the major part of China’s GDP (40 to 50 per cent according to various estimates) is due to domestic consumption, slower purchases by consumers are a big risk to maintaining reasonable growth.

Furthermore, the Chinese have stopped buying houses and all construction indicators have turned negative. With construction estimated to have generated one-third of 2007 growth, this prompted a Beijing economics professor to say "It's a show of patriotism to buy a house now."  Still potential home buyers will wait until they feel housing prices are reasonable again: the professor’s call generated anger rather than patriotism across the internet chat rooms as citizens responded that developers have profited unduly from the previous price increases.

It is not an exaggeration to say that all of China’s growth engines are sputtering badly, reviving risks of social instability.

Opportunities in Construction, Power, Transport & Environment

Social stability is the top goal of China’s leadership. Indeed, China’s history has alternated between periods of unity and chaos. The last chaotic episode of the late 19th and first half of the 20th century has just about finished in historical terms: memories are still alive with the wars, massacres and famines. Today’s Chinese will rather make sacrifices than risk new chaos as long as they feel that their government is fair and capable.

Under the current deflationary and growing unemployment circumstances, the government will have the opportunity (and, indeed, no other choice) to further increase its spending on large projects. Rumours abound that in October the central government gave strict instructions to start spending RMB1 trillion “within 100 days”.

The amounts that need to be spent to prevent this economic shock from turning into a deflationary spiral are staggering. The much publicized RMB4 trillion ‘stimulus’ package details give an excellent idea of where foreign companies can benefit:

Transportation (mostly urban and national railway systems) and power will benefit most. Foreign companies with competitive technologies in the construction and civil engineering could gain enormously from the coming spending.

China will suddenly become an important market for environmental technologies (in which the West is considerably more advanced) while local R&D efforts to develop own technologies will be financially strongly encouraged.

Low-Cost High-Tech

As a direct result, a foreign software producer was recently offered by a municipality 20,000 sq m of office space for free for five years and RMB6 million in cash over the next two years to support the training of its workforce.

The improving technological environment and government incentives combined with falling production costs will generate a whole new set of opportunities for international firms that want to improve their competitiveness: high technology at Chinese prices. This in turn will generate a new wave of foreign investments and launch a new cycle of economic development.
 
Year of the Golden Ox
 
Though the next two to three months will be very hard while the additionally government projects are finalised, the second half of 2009 will most probably see stable prices due to the extra money being injected into the economy. Consumer confidence should rise and exports rebound due to very attractive production prices and a new shift in production to China in higher tech fields. Economists still expect between 5 and 7.5 per cent growth.
 
The new Chinese year will start in February; and 2009 will not see the return to the bull markets of previous years. Yet, confidence is not ill-placed for this year of the Golden Ox, traditionally one of steady increase in prosperity through hard work.
 
 

Keywords : Economy, Growth, Unemployment, Investment

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