China's Economy Faces New Problems

Thursday I noted there would be more bank failures announced on Fridays. Well, Sheila Bair just proved me right again. It is so tough being me and being right so often - though it really helps to make easy predictions.

My prediction by the way was based upon increasing problems in commercial real estate and small business loans, both of which are quite problematic for local and regional banks. Expect many more this year.

China, Oh China

I write a lot about China as my daughter is from there and her mei mei, little sister, should be coming from there in about two months. I also write about it because it is the number three economy, the largest world population and a major potential place for political and social unrest in years to come. Fitch is now predicting a hard landing in China. If you have followed me (and perhaps believe me) this is no surprise. I mean this fits right into my two-plus-two theory of financial life. Two-plus-two is simply my own approach to macro-economic ideas. Not unique to me, just how I like to think about it. Let's apply two-plus-two to China.

Here we have a lot of twos, but you will get the idea. What does China face?

1. All their trading partners, for the most part, are in a severe recession, so they are not selling much.
2. The Baltic Dry Index, an index of shipping, is at absolutely rock bottom. Much of this is due to a lack of trade but some of it is due to a lack of credit and letters of credit that allow trade to flow on ships. Either way, not good for China.
3. China needs about 8% growth just to tread water. Anything less there is a recession, and right now it is looking like much less.
4. China is not totally export driven, but another major domestic business support is commercial real estate, and that area is really sucking wind right now.

There are more reasons, but these are up there. These are objective factors that simply prove what otherwise is speculation. China, like the rest of the world, is in dire straights.

Job Losses Continuing

This is hardly a surprise that job losses continue. Unemployment usually peaks long after a recession ends and right now we are not seeing the light at the end of this recession tunnel. Here are some of the latest losses, which I think adds up to about 50,000 jobs. We truly need to help these people instead of spending $138 billion on BofA. Spending that much on a company that helped to cause the problem when we have so many more more pressing problems is making me sick. This is just disgusting what we are doing. Just my opinion.

Disclosures: None.

Comments

[Rayto:]

"China needs about 8% growth just to tread water. Anything less there is a recession, and right now it is looking like much less".

This statement makes no sense.

Jan 18 07:45 AM

[Alphameister:]

At least no trees died in the posting of this article!

Jan 18 08:45 AM

[Ferdinand E...:]

You got it right, Rayto!

What about 7.9 percent author, and as for the export story, China is in the process of passing Germany to take first place.

I taught in Hong Kong a few years ago, and had a chance to look around a bit. Those people have got what it takes. Yes, for an economy where exports are as important as they are for China, the fall in demand for the rest of the world is bad, but don't worry. They have what it takes, and they are just getting started.

But you are right about one thing. What you have written is just your opinion.

Jan 18 09:53 AM

[Ben Gee:]

When you are used to 10, 11,or 13% growth rates, 8% does seem like a recession. But Chinese people will have to learn to live with slower growth.
And Chinese people will learn that 8% growth with 4% inflation or less is much better than 12% growth with 12 % inflation only 11 months ago.
The whole world would love to have China's problems. Never mind 8% growth, we in North America love to have 1% growth or 0% growth instead of negetive growth.
China is in the process of restructuring its economy from over dependant in export to developed countries. While overall export decreased in November and December, the overall Chinese economy still grew. In the Pearl River Delta area, where all the export factories were closing, its growth for 2008 was 10.1%. Oh, while 63000 business went down, 101000 new business started there at the same time.
I hope China's growth will be moderate, I do not like to see inflation come back.

Jan 18 10:52 AM

[sylviechen:]

It would be interesting to know which China export segments have fallen and which are stable (e.g, toys vs electronics vs machinery). Since a lot of industries are concentrated in single areas (button mfg comes to mind), a drop in one segment could cause extreme economic hardships in local areas. I know that textiles are heavily impacted but solar panel mfg as yet continues to expand.

Anyone know a source?

Jan 18 11:11 AM

[Craig Brown:]

My apologies for not explaining it a bit more, but China does need an 8% growth rate to support the influx of rural peasants into the workforce. They target 8% or more growth there as that is seen as crucial in avoiding rising unemployment and social unrest. Don't take my word for it, visit this recent article.

www.telegraph.co.uk/fi...

Jan 18 11:25 AM

[Lonestar1:]

Asia, particularly China, may have something similar to our 1929 due to overcapacity. And US may experience scarcity of goods as Europe did back then. That is the practical implication of hyperinflation. It's not a pretty for anyone.

Jan 18 12:10 PM

[huangthomas:]

8 or 7.5% is a buzz word in Beijing. This is the growth rate which would lift more Chinese out of poverty. Now there are 100 million poor in China according to Xinghua. The number is growing due to recent increase in at least 6 million unemployed migrant workers. No Chinese in their right mine would leave so many poor people in China. Not to mention social tension created by poverty. Would you study China more carefully, and stop that "nonsense".


On Jan 18 07:45 AM Rayto wrote:

> "China needs about 8% growth just to tread water. Anything less there
> is a recession, and right now it is looking like much less".
>
> This statement makes no sense.

Jan 18 01:35 PM

[huangthomas:]

Every year around Chinese New Year, Chinese media like to publish the number of Chinese millionaire and billionaire. There are so many of them in China, only second to the United States. Then I read a sarcastic editorial in Xinhua: Why reporting only on our number twos. Why no one mention our No. 1: the number of poor people in China. The central government in Beijing is very responsive to this issue.

Jan 18 02:10 PM

[madmilker:]

People in America need to realize jus what got America in this shape...cheap... yes so-call cheap items from a foreign land.

quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!

Now! if there be 182 country's making items for the world to buy and they have only 5% of the pie in China...duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there.... but with the yuan going up in value and the US dollar going down...all the foreign items that the American consumer buys thinking it is cheap has went up in price.

People...its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the "we the people" have to turn to the "second" largest employer in America(Uncle Sam) to sell "we the people" debt in order to get all them dollars back!

50 years ago a foreigner would had given their left nut for a US dollar or a Hershey's chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think "MADE IN AMERICA."

quote*"Considering that there are over 30,000 ships at sea this morning," writes James Carlton, director of the Williams College-Mystic Seaport Maritime Studies Program, in an e-mail, "the total number of organisms and species in this global 'bioflow' on the morning your readers read your piece could be staggering - billions of individuals, and thousands of species."

Indeed, scientists have long considered ballast water the primary way invasive aquatic organisms are introduced. From the zebra mussel's arrival in the Great Lakes, to an American jellyfish severely disrupting Black Sea fisheries, the potential costs of accidental introduction of a species to new homes can be tremendous. Aquatic invasives cost the US $9 billion yearly, according to estimates by David Pimentel, professor emeritus of ecology and evolutionary biology at Cornell University in Ithaca, N.Y. Zebra and quagga mussels (a cousin to the zebra) alone cost the $1 billion annually.*end quote!

$9 billion in cost to all taxpayers up front for tat so-call cheap is chic crap from a foreign land....those nice people of Germany and South Korea woke up to all tat hiden cost....and the nice people in Japan and Mexico have went back to supporting their country....so! with less and less money to kite fly from every store each day at 00:15 and more and more vendors demanding money at 30 to 60 days out not the 90 day norm....no wonder tat company with tat star in the name sold another $1 billion dollars of of bonds this past week....
remember....if you buy foreign...no one in your country made it...

Jan 18 08:38 PM

[Boriga:]

I could not agree more. Thank goodness those poor trees are not wasted on such mantra driven "at least 8%....treading water......social unrest.....blah blah blah"

Living in China many years, trying to keep abreast of what is going on here is rarely achieved by reading what some self acclaimed China experts write. A walk down the street and a chat with a few people can tell you far more.

China is in transition as a result of the global turn down. However, it's been in one for the last 60 years, so most people, even the young who have never seen significant economic downside, are all resilient and basically positive. They simply look back at the days gone by, at political anarchy, famine and near universal food shortages and then look at their situation today. Imminent starvation or social persecution are not on almost anyone's immediate radar screens. For the vast, vast majority, things have frankly never been so good and even now when faced with unemployment, with the cushion of substantial savings as well as the belief that with a change of location or skills other work can be found, drives the vast majority on.

As an example of what is happening, per-quarter urban retail sales growth rates, year-on-year, (2007-2008) were 21.0%, 22.7%, 23.7% and 20.9%, whereas rural quarter y-o-y growth was 19.1%, 18.4%, 18.4% and 23.7%. Figures for early January are even more upbeat.

Things most certainly are not perfect. China is in transition as a result of external shocks, but what's new?


On Jan 18 08:45 AM Alphameister wrote:

> At least no trees died in the posting of this article!

Jan 18 09:50 PM

[TJ Schoenlein:]

Having never read anything posted by Mr. Brown, I had just about passed on this piece after reading his first couple of sentences.
He needs to reduce his "Hubris" meds.

Jan 18 09:58 PM

[Tally:]

I'm in low end manufacturing in China and the common workers have started leaving early even though I'm offering more money and still have plenty of orders. I think they've had the silk pulled over their eyes by their own Govt. saying everything is ok. They don't realize how much easier its going to get to replace all of their jobs after CNY because of factory closings and competing for jobs. If you ask any Chinese on the street, they are totally unworried. China also has laws against unpaid leave unlike the US. If they can't be afforded by their employer, they'll be fired or the company will shut down. Next year I'm sure there will be plenty of good, hard workers not willing, but trying to get jobs that will simply give them 3 meals a day and housing. forget about spending money. This is going to get dangerous on many levels.

Jan 18 11:12 PM