Friday, February 24, 2012

China's Domestic Spending

(A cross-post from the Docent's Memo)

An article from the China Daily discusses surveys on spending and consumption by Chinese women. The first thing that caught my attention was the large amount of money that went into investments and savings--nearly 40% of income, according to the article. The other point that caught my attention was this:
About seven out of 10 families invested in 2011, with Chengdu ranking first, followed by Guangzhou and Ningbo. The most popular investments were stocks, real estate, banking products, funds and commercial insurance.

But only 13.5 percent made a profit on their investment, 33.7 percent broke even and nearly 30 percent lost money. 
The article gave this example:
Lin Lang, who owns a wedding gown studio in Beijing, bought banking investment products and commercial insurance last year. But neither yielded returns in excess of the inflation rate.

To her disappointment, the market value of one of her properties in Beijing's Central Business District fell below what she paid for it in 2010.

"Stocks are risky. Gold might be an option," she said. "But I guess the best investment is to avoid spending and make more money from our real business."
The article further reported:
Huo Jianguo, president of the Chinese Academy of International Trade and Economic Cooperation, a think tank of the Ministry of Commerce, said female spending had assumed a leading role in lifting domestic consumption.

Promoting domestic consumption is a government priority to spur economic growth as the export outlook dims amid slack demand from Europe and the US.
Another article, on China's oil exploration plans, stated:
China's crude oil demand rose 2.7 percent in 2011, while natural gas use rose 12 percent, according to the National Bureau of Statistics, which didn't give absolute volumes.
As has been noted in earlier posts and articles that I've linked to, China's official growth statistics are smoke and mirrors, and it often requires a peak at underlying statistics and information to get a feel for how China is really doing. For an economy that was white hot just a few years ago, anecdotes and statistics like that above don't paint a very rosy picture. The interesting thing to me is that, culturally, China is a nation of savers. But according to the information above, the savers are slowly losing their savings. Roughly a third lost money, and another third only broke even. "Broke even" doesn't sound like they beat inflation. Even for those that "made a profit," how profitable was it? If this continues, we can expect to see a significant shift in China's domestic investment/savings with people trying to pull their money out of investments such as stocks and real estate, and shift them to gold and silver (or move the money out of the country), which may trigger a sudden decline in stock and real estate prices.

With that in mind, you may want to read this article entitled "The End of the Chinese Century." The author writes:
Most people still assume that the 21st century will belong to China, which is projected to soon become the world’s largest economy. The International Monetary Fund, for instance, believes China will take over the top spot from the US by 2016.

Yet the country’s fate seems to be shifting rapidly. Since the IMF made that bold-sounding prediction in April last year, the Chinese economy has stalled. It began to stumble in September, and by December the signs of flat-lining growth were unmistakable: stagnant car sales, declining electricity consumption, plunging industrial orders and slowing exports. Container throughput has been flat, and air cargo has plunged.

The deterioration has been as rapid as it was unexpected. In short, after 35 years of virtually uninterrupted growth, the wheels are coming off the Chinese economy.

It is not hard to see why. To avoid the worst effects of the 2008 global downturn, Beijing applied too much stimulus.

In 2009 alone, Chinese technocrats and their state-owned banks pumped about US$1.1 trillion into a US$4.3 trillion economy. The maneuver added to GDP, but it also triggered stock and property market bubbles and runaway inflation.

The stock market boom of 2009 began to unwind in 2010. Beijing avoided the worst effects of that, but it has yet to deal with the other dislocations.

Inflation, in all probability, is still running at twice the official rate. And while inflation is cooling fast, that decline indicates an economy in distress.

Meanwhile, property prices are collapsing – developers are offering double-digit discounts in many coastal cities. That trend could create a negative wealth effect, ravage bank balance sheets and decimate revenues of local governments.
And China has expended about all of its tools for averting an economic meltdown:
If monetary tools prove ineffective, Beijing’s only real option will be direct spending – what some call “tidal wave investing.” The biggest risk for the economy this year is that this stimulus spending fails.

First, China has already built its “ghost cities” and other unviable projects. Second, prior spending has burdened banks and local governments. In 2010, for instance, about 85% of Liaoning province’s 184 financing companies (de facto government agencies) defaulted on debt service payments. The world has already seen the Japanese try spending their way out of a bubble and debt crisis – and we know how well that worked out.

Third, China’s once-in-a-decade political transition, which formally begins in the fall and continues for perhaps two years, looks like it is already undermining efforts to revive the economy. In 2008, the central government acted quickly and decisively to forestall economic crisis. This time, however, political paralysis in Beijing means that officials can adopt only modest steps that seem inadequate in light of the evident severity of the downturn.

Finally, there is growing pessimism among Chinese people that Beijing can turn the economy around. Perhaps the worst sign is that the rich are illegally transferring funds out of the country. As a result, Beijing’s foreign reserves are now decreasing every day, according to some reports. The Chinese obviously sense that the end of their economic miracle is near.
The author may be overly pessimistic, but, as I stated, I would expect that the Chinese people will soon be starting to pull their money out of investments and savings en masse.

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