Hong Kong's 8% Mantra

Eight percent is the magic number for China and everyone that I met today in Hong Kong knew it. Conventional wisdom is that if the economy grows by 8% in 2009, all will be well for the Peoples Republic of China. The crashing export sector won’t be a problem. Tens of thousands of business failures won’t make a difference. Banks won’t have bad domestic loans to write off. And, unemployment won’t rise. All the economy needs to do is grow 8% and everything will be OK.

Today I met with senior bankers from two money center banks (one Chinese and one Western), two Consul Generals stationed in Hong Kong (both representing Asian nations) and a whole bunch of business people. And one thing was clear; to the person they are “true believers” in 8% GDP growth. Everyone seems to think that the government has “special ways” to make sure that the growth target will be achieved. Slower growth hadn’t been considered and wasn’t thought to be possible.

The 8% mantra was repeated with an almost ritual cadence despite evidence that 8% is far from certain and it is likely that 2009 growth could be considerably less than the target. And personal observations that contradicted conventional wisdom didn’t cause anyone to question their belief. I think that the implications of less than 8% growth are too scary to contemplate for most Chinese. Some of the contradictory observations I was told include:

• Staggering numbers of business bankruptcies and liquidations have happened and the pace is about to accelerate. On January 26 the year of the Ox is going to begin and China is going to be gored. There is general agreement that tens of thousands of companies will shut down for the Chinese New Year and never reopen. And that is in addition to the tens of thousands of companies that have already closed. Apparently many debts need to be settled before the Chinese New Year and companies that can’t meet their obligations won’t reopen after the holiday. Millions of migrant workers are traveling home to families without money and without a job. Economic damage will expand to rural areas where extended families of these workers depend on cash earned and sent home to survive.
• The export sector is crashing. Conventional wisdom is that only 17% of the economy is related to exports and therefore an export crash won’t make a big dent in growth. There are two problems with this theory. First, as export sector activity crashes, the rest of the economy will have to grow at a much faster pace to make up the shortfall. But, other than government spending, the rest of the economy is soft and no one could point to a sector that can take up the slack. Real estate prices are down approximately 20%. Overall manufacturing is shrinking. And consumer confidence is falling. Second, it is likely that the actual amount of the economy tied to exports is much greater than 17%. The conventional wisdom doesn’t fully take into account the part of the economy that supports and feeds exporters and their workers. And the ripple effect of tens of thousands of failing businesses is unimaginable and may have a “multiplier” effect because of the spillover to general consumer confidence.
• A vulnerable banking sector. Currently, the banks are restricting credit to domestic companies. After all, they were the lender to the tens of thousands of companies that are failing. While the banks are not admitting to increases in non-performing assets, all indications are to the contrary. Since Chinese banks are often secured by real estate, they may be able to delay recognizing loan losses until the ultimate liquidation of their real estate collateral. But real estate values are down and, as a result, loan losses, while taking a while to work through the banking accounting systems, will inevitably be realized. As a result, the banking sector’s ability to finance growth is at risk.
• Plunging consumer confidence. The savings rate, while already high, is increasing as families hoard cash to protect themselves against hard times. Most people believe that consumer confidence is dropping and consumer spending is in trouble. Unfortunately, there are few “automatic” stabilizers such as unemployment insurance and government assistance to the poor in China like in the United States. The “safety net” as we know it in the West doesn’t exist and weak consumers have little in terms of government support when they are in trouble.

The Chinese government is working hard to make sure that they hit the 8% growth target. Infrastructure spending is accelerating and interest rates are being cut every few weeks. However, given the softness that is occurring in January, the likelihood after the Chinese New Year’s business failures of a weak February and the issues that are rippling through the banking and consumer sectors, the growth target seem ambitious and probably out of reach (at least if the numbers are calculated in the manner consistent with US GDP). The implications to geopolitical and financial stability are enormous -- and all bad.

Comments

[DHH:]

"I think that the implications of less than 8% growth are too scary to contemplate for most Chinese."

Or maybe most Chinese know their economy better than you do and are more confident, based on a 30 year growth rate that has not been matched in modern history.

Jan 07 09:34 PM

[rlirph:]

The truth is that many Chinese workers are already laid off. All you have to look is the number of passengers processed through the Guangzhou Central Rail Station every day. The outflow (migrant workers going home) started earlier and more people are going home at this time this year compared to previous years. While most people including myself speculate many workers will not return because their factories will be closed. Having a small business in the Guangzhou-Dongguan-She... area all I have to say is that sales fell by half in November and another 30% in December. Without considering November and December our 2008 sales was 18% ahead of last year.


On Jan 07 09:34 PM User 333239 wrote:

> "I think that the implications of less than 8% growth are too scary
> to contemplate for most Chinese."
>
> Or maybe most Chinese know their economy better than you do and are
> more confident, based on a 30 year growth rate that has not been
> matched in modern history.

Jan 08 07:17 AM