Chinese economy stumbles again
HONG KONG — Brightly hued men’s underwear in a rainbow of colors is no longer selling well in Europe for the Zhongtian Garments Company in Xiamen, China. Exports are down 30 percent in the last year.
Children’s guitars with bodies resembling cats and cartoon characters are losing their charm for Yuesen Musical Instrument Factory in cause of huge increases in lending by Huainan, China. And at the Yuzhongniao Outdoor Products Company in Jinjiang, domestic sales and exports alike are declining this year. The Canton Fair, China’s biggest export event, ended witfew new orders. “We are not even getting many people browsing this time,” said Alice Hong, Yuzhongniao’s sales manager.
After a powerful recovery through the autumn and winter from a V-shaped downturn last summer, China’s economy is unexpectedly faltering once again. Exports are weak. The country’s domestic economy is still growing mostly. That combination has prompted growing concerns among economists and business executives about the sustainability of even 7.5 percent growth in China in the coming years.
Louis Kuijs, an economist in the Hong Kong office of the Royal Bank of Scotland, estimated that with the exclusion of overinvoicing, export growth came to only 5.7 percent.
Over the last few years, economists have tended to pay less attention to China’s exports because they were declining as a share of the country’s total economic output, because of weak overseas demand. But newer research suggests that China may still be dependent on exports.
The reason is that multinationals have been rapidly localizing their purchases of various items like computer chips and auto parts in China instead of importing them from other Asian neighbors. So while total exports may not have been rising quickly in recent years in China, the Chinese content in each dollar of exports has been increasing.
Mr. Kuijs estimated that 20.7 percent of China’s economic output came from exports last year, a figure that had bottomed out in 2009 at 19.7 percent.
In a bad sign for exports in the months ahead, the Canton Fair announced that export orders placed at this year’s spring session had fallen 1.4 percent from a year ago. It was the latest sign that steeply rising bluecollar wages in China and a gradually appreciating currency are starting to erode the country’s international competitiveness; foreign investment in China has also begun to level off, while surging in lower-wage countries in the region, like Cambodia and Vietnam.
Li Yong, the general manager at Yuesen Musical, said that many Japanese, Taiwanese and Korean companies in his industry had recently moved to Indonesia as costs climbed in China.
What has kept the economy running is the huge volume of cash being pumped into it. Total social financing — a measure of all nongovernment borrowing from banks, bond markets, trusts and other sources — surged 58 percent in the first quarter of this year from the same period last year. Offbalance-sheet financing from the so-called shadow banking sector has been particularly active.
Local and regional governments have also been borrowing heavily, as have special financing units that many of them have set up. The central government is now trying to rein in this borrowing, said Terry Gao, an associate director of international public finance at Fitch.
Borrowing — by a range of local, regional and national government agencies as well as many state-owned enterprises and some private businesses — is increasingly a concern. While total government and private sector credit in China as a share of economic output is still lower than the United States or Japan, it is rising steeply. It has already climbed to roughly 200 percent now from 120 percent in 2007.
The efficiency of heavy lending across the entire Chinese economy has plummeted, raising worries about the sustainability of Chinese credit-fueled growth. Through 2007, each dollar of additional credit set off an extra dollar of economic output. But now $3 to $4 of extra credit is extended before the same increase in output takes place, an indication that less economically viable roads, rail lines, business expansions and other investments are being financed.
China’s current economic model, with its swift buildup of debt to stave off a steeper decline in economic growth rates, “can probably go on for a while, certainly through this year and into 2014, but the potential financial stress in this is clearly going to rise,” said George Magnus, a senior economic adviser to UBS.
China is borrowing almost entirely in its own currency. It also has virtually no foreign debt and a high savings rate.
The country’s growing ranks of skeptics are unconvinced by these arguments. “You could have this same conversation about Japan in 1989,” Mr. Magnus said. “The fact Japan was a creditor country with a lot of savings did not stop a major bust from taking place.”.