Bei­jing strug­gles with ‘new nor­mal’

The China Post - - COMMENTARY - BY JOE MCDON­ALD

Main­land China’s slump is shak­ing the world econ­omy, turn­ing a coun­try long seen as a growth en­gine into a pos­si­ble threat.

The slow­down started as a side ef­fect of the Chi­nese Com­mu­nist Party’s plan to steer the world’s sec­ond-largest econ­omy to a “new nor­mal” of lower, stead­ier growth. It has turned into a nose­dive the party is strug­gling to re­verse.

The party’s plans call for keep­ing eco­nomic growth close to 7 per­cent this year while China shifts from re­liance on trade and in­vest­ment to more self-sus­tain­ing growth based on do­mes­tic con­sump­tion.

Ex­ports were sup­posed to grow by 6 per­cent this year, but in­stead they are shrink­ing. Fac­to­ries are shed­ding mil­lions of jobs, threat­en­ing to in­flame po­lit­i­cal ten­sions. New in­dus­tries in­clud­ing e-com­merce are grow­ing but still are too small to off­set job losses in tra­di­tional busi­nesses.

“There are pock­ets of ex­treme weak­ness in China’s econ­omy but also ar­eas of strength,” said Mark Wil­liams, chief Asia economist for Cap­i­tal Eco­nom­ics in Lon­don. “The ser­vices sec­tor seems to be do­ing well, but in­dus­try is re­ally strug­gling.”

The New Nor­mal

The Chi­nese Com­mu­nist Party suc­ceeded at cool­ing a debt-fu­eled con­struc­tion and real es­tate boom. But cre­at­ing a con­sumer econ­omy is tak­ing longer as house­holds fac­ing an un­cer­tain job mar­ket tighten their belts. Steel, coal min­ing and heavy in­dus­try are cut­ting work­forces while re­tail spend­ing and new in­dus­tries are grow­ing but still are small. The gov­ern­ment re­ported eco­nomic growth held steady at 7 per­cent in the latest quar­ter, though pri­vate sec­tor an­a­lysts say the real fig­ure might be 5 per­cent or lower. What­ever it is, growth is due to fall fur­ther. Com­mu­nist lead­ers say they can tol­er­ate lower head­line growth so long as the econ­omy gen­er­ates enough jobs.

Man­u­fac­tur­ing And Ex­ports

Sales by China’s pow­er­house ex­porters, who em­ploy tens of mil­lions of peo­ple, shrank by an un­ex­pect­edly sharp 8.3 per­cent in July from a year ear­lier. It looks in­creas­ingly un­likely China can meet its 2015 growth tar­get of 6 per­cent. The rul­ing party wants to avoid dump­ing laid-off fac­tory work­ers into the job mar­ket. The num­ber of fac­tory jobs in the south­ern province of Guang­dong, heart­land of China’s ex­port in­dus­try, fell by nearly 5 mil­lion from a year ear­lier to 13.3 mil­lion in first quar­ter of 2015. The China La­bor Bul­letin, a re­search group in Hong Kong, says there have been 211 strikes this year in Guang­dong, mostly over back wages owed to laid-off work­ers.

Main­land Chi­nese Stim­u­lus

The

threat

of

job

losses has forced Bei­jing to in­ject money into the econ­omy through rail­way con­struc­tion and other mea­sures, set­ting back ef­forts to re­duce re­liance on in­vest­ment. Bei­jing has cut in­ter­est rates five times since Novem­ber. That re­duces fi­nanc­ing costs for state com­pa­nies but does lit­tle for en­trepreneurs who gen­er­ate wealth and jobs but have lit­tle ac­cess to the state-owned bank­ing in­dus­try. Pri­vate sec­tor an­a­lysts say the quick­est way to re­vive the state-dom­i­nated econ­omy is to move faster on promised re­forms to give en­trepreneurs a big­ger role. Bei­jing’s sur­prise Aug. 11 de­val­u­a­tion of its yuan was crit­i­cized by some as an at­tempt to help strug­gling Chi­nese ex­porters, but econ­o­mists said the 3 per­cent change was too small to make a dif­fer­ence due to weak global de­mand. Still, it prompted fears of a “cur­rency war” if other gov­ern­ments re­sponded by de­valu­ing their own cur­ren­cies to keep ex­port prices low.

Banks

Main­land China’s state-owned bank­ing in­dus­try is a pow­er­ful tool that al­lows Bei­jing to chan­nel money to po­lit­i­cally fa­vored projects or to force cash into the econ­omy to boost growth. Lend­ing rose in July, but an­a­lysts say much of the in­crease went to other fi­nan­cial in­sti­tu­tions. That in­cluded loans to a state-owned com­pany that was charged with prop­ping up the sink­ing stock mar­ket by pur­chas­ing shares. At the same time, lend­ing to busi­nesses weak­ened. Com­mu­nist lead­ers say they want to make state-owned banks more mar­ket-ori­ented and com­pet­i­tive. But en­trepreneurs still get few loans and bor­row in­stead from an un­reg­u­lated un­der­ground credit mar­ket at high in­ter­est. De­faults spiked as the econ­omy weak­ened, mak­ing loans harder to get and in­flict­ing losses on small in­vestors who en­trusted money to un­der­ground lenders. At the same time, reg­u­la­tors are tight­en­ing con­trol over “shadow bank­ing,” or lend­ing and the sale of fi­nan­cial prod­ucts by state banks out­side their nor­mal oper­a­tions. The lack of de­tails re­leased by banks has prompted con­cern they might be fail­ing to dis­close risks, but in­dus­try an­a­lysts say such un­cer­tainty is de­creas­ing.

Con­sumers

Re­tail sales are a bright spot in China’s econ­omy. Growth edged down in July but to a still-healthy 10.4 per­cent, while online com­merce is grow­ing at twice that rate. Still, the in­dus­try is grow­ing from a very low base. In the south­ern province of Guang­dong, re­tail­ing em­ploys 1.3 mil­lion peo­ple, barely one-tenth the num­ber in man­u­fac­tur­ing. And some in­dus­try seg­ments have suf­fered set­backs. Auto sales fell 3.4 per­cent in June and that de­cline ac­cel­er­ated to 6.6 per­cent in July, star­tling fore­cast­ers who ex­pected 7 to 8 per­cent growth this year. Some have slashed their growth out­look for the year to as low as 1.7 per­cent, a trou­bling de­vel­op­ment for Western au­tomak­ers such as Gen­eral Mo­tors Co. and Volk­swa­gen AG that face lit­tle to no growth else­where and look to China, the big­gest mar­ket by num­ber of ve­hi­cles sold, to drive fu­ture rev­enue. Sales of home ap­pli­ances and fur­ni­ture also have weak­ened, pos­si­bly due to slower hous­ing sales.

Swoon­ing Stock Mar­kets

The ex­plo­sive rise and abrupt fall of Chi­nese stock prices has in­flicted losses on small in­vestors and threat­ens to set back eco­nomic re­form plans. The rise started last year af­ter state media said stocks were in­ex­pen­sive and ac­cel­er­ated de­spite weak­en­ing man­u­fac­tur­ing and trade. The col­lapse in prices from their June peak has wiped out this year’s gains, sour­ing small in­vestors. The num­ber of Chi­nese house­holds that own shares stood at a rel­a­tively mod­est 8.8 per­cent in the sec­ond quar­ter of this year, ac­cord­ing to a sur­vey by South­west­ern Univer­sity of Fi­nance, well be­low the one-third or more of house­holds in the United States and other Western mar­kets that in­vest in stocks. The mar­ket slump would set back the party’s hopes of get­ting more or­di­nary Chi­nese to in­vest in the mar­kets and of hav­ing state com­pa­nies raise money through stock sales to re­duce debt and mod­ern­ize.

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