China stum­bles

A re­ces­sion seems pos­si­ble – keep­ing com­mod­ity prices de­pressed

Finweek English Edition - - Companies & Markets -

WHILE THE EYES of the world re­main fixed on the West’s bank­ing cri­sis there’s what are de­scribed as “dis­turb­ing de­vel­op­ments” in China, on which so much hope is be­ing placed by com­mod­ity ex­porters such as South Africa. French bank­ing group So­ciété Générale has just re­leased a re­port pre­dict­ing China – just like the United States – is go­ing to land up in a re­ces­sion. If that hap­pens it would mean there’s more bad news ahead for the JSE’s com­mod­ity shares.

The writer of the re­port, Al­bert Ed­wards, doesn’t trust the of­fi­cial fig­ures say­ing that China recorded a growth rate of 6,8% in the year to the beginning of the fourth quar­ter 2008. Nev­er­the­less, that com­pares with 13% for 2007 and is there­fore even lower than the min­i­mum growth rate of around 8% China is claimed to re­quire in or­der to fore­stall more do­mes­tic un­rest.

Ed­wards says elec­tric­ity con­sump­tion is a re­li­able in­di­ca­tor of what’s go­ing on in that huge econ­omy. And in the year to the fourth quar­ter that fell by 6%, against an av­er­age in­crease of 15%/year over the pre­ced­ing five years.

Ed­wards says that in the past, growth in elec­tric­ity con­sump­tion has al­ways run handin-hand with growth in the gross do­mes­tic prod­uct. Heavy in­dus­tries that use a lot of elec­tric­ity, such as steel man­u­fac­tur­ing, are hav­ing an es­pe­cially hard time. In­dus­trial pro­duc­tion con­se­quently in­creased by only 5,7% last year, as against an an­nual fig­ure of 18% to­wards the end of 2007.

At the same time, warn­ing lights are be­ing flashed by the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment’s (OECD) lead­ing in­di­ca­tor for the Chi­nese econ­omy. Eco­nomic ac­tiv­ity has fallen to the low­est level in 26 years, ac­cord­ing to that in­di­ca­tor. Thou­sands of fac­to­ries in China have al­ready closed, leav­ing mil­lions un­em­ployed. Some of those have been ob­served join­ing demon­stra­tions by other dis­sat­is­fied cit­i­zens.

Many fac­to­ries still pro­duc­ing are shaky af­ter over­seas de­mand for their prod­ucts has fallen sharply. The HSBC bank­ing group es­ti­mates China’s ex­ports in the cur­rent quar­ter could fall by 19% against a year ear­lier.

While China’s ex­ports are fall­ing there’s also great con­cern in an­other area. That’s the weak­ened state of its home build­ing in­dus­try, which was ac­tu­ally brought about by the au­thor­i­ties them­selves due to their mea­sures to avoid over­heat­ing. That’s hit the de­mand for a wide va­ri­ety of com­modi­ties, from steel and cop­per to ce­ment. It’s hoped ef­forts to stim­u­late hous­ing construction will pro­duce re­sults fairly soon. But that won’t be easy, since the mil­lions of un­em­ployed are hav­ing a neg­a­tive ef­fect on the en­tire coun­try.

As part of its ef­forts to main­tain growth an in­fra­struc­ture pro­gramme of al­most US$600bn (around R6 000bn) is planned. How­ever, sev­eral an­a­lysts are scep­ti­cal about the re­sults that will achieve, be­cause China’s cen­tral gov­ern­ment will fi­nance less than 25% of that amount while its banks – like else­where in the world – are hes­i­tant to lend to busi­nesses un­der pres­sure.

But China’s ma­jor banks are con­trolled by the state and their chair­men ap­pointed by Bei­jing. As one com­men­ta­tor says: “If gov­ern­ment says grant the loans, the loans will be granted!”

What’s en­cour­ag­ing is that re­tail sales were strong over the past year, de­spite the many dis­missals. They in­creased by 18% against 2007 and in or­der to try to main­tain the mo­men­tum a re­bate of 13% will, for ex­am­ple, be granted to ru­ral con­sumers when they buy so-called white goods (fridges, stoves, etc).

It’s clear China’s au­thor­i­ties will go out of their way to stim­u­late the econ­omy. How­ever, it’s also clear Bei­jing un­der­es­ti­mated the ef­fects of the world­wide down­turn and the ques­tion is whether it will be able to act quickly enough to ward off a se­ri­ous down­turn – even a re­ces­sion.

But what brings hope for coun­tries such as SA is that China is ex­pected to re­turn to the mar­ket by the sec­ond half 2009 as a steady buyer of com­modi­ties, since the stock­piles cur­rently be­ing used can’t last for ever.

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