China battles economic slowdown

Wenzhou.pngWenzhou in coastal Zhejiang province was the first city to encourage private enterprise when China began opening its economy in 1978. Its growth accelerated after China joined the World Trade Organisation in 2001, attracting 2.8 million migrant workers to join the city’s population.

Now its 9 million people are at the forefront of China’s slowdown, according to an on-the-ground report from Bloomberg, which notes:

“The once bustling city centre is in decline”
• “Businesses are suffering because of weak demand, higher raw material costs and rising wages”
• “70% of businesses rely on exports…leaving it vulnerable as Europe’s crisis crimps expansion”

City centre roads, once packed with traffic are now empty. Shopping areas are also quiet, with shops already advertising 40% sales, a month ahead of the usual timing.

Bank lending has now entered a vicious circle. Wenzhou once had a thriving private lending sector, which powered the city’s sustained expansion. But the downturn in demand caused 60 business owners to flee in January/February, as they couldn’t make the repayments due. So now lenders are sitting on their hands, causing more businesses to close.

The effect on ordinary people is stark:

• Mr Liu, a taxi driver, used to earn Rmb 5000/month ($750)
• Today he earns just Rmb 3000/month from his 12 hour shifts
• Food takes half his earnings, Rmb 1500/month
• After other costs, he has just Rmb 400/month for rent

Similarly, the city’s former property boom is collapsing:

• Prices fell 14% in May, the fastest drop in the country
• But apartments still cost Rmb 30000/sq metre ($3950/sq yard)
• This is equal to the average annual per capita disposable income
• High end prices have fallen from Rmb 70000/sq metre to Rmb 40000

This is not like 2009, when the government could pump up the system with easy lending. Instead, policy remains effectively on hold, until the selection of the new Politburo is finalised in October. Meanwhile, as the official China Daily notes, local governments are instead often focused on meeting their GDP targets via a ‘make and break’ construction policy.

In Shenyang, for example, it reports that the city has just blown up a 9 year-old indoor sports stadium, which cost $126m and was the largest in Asia when it was built. Its reporter, Huang Xiangyang adds:

“I don’t know how much of our GDP comes from this make-and-break game played by some local officials. But I do know it not only wastes resources and causes irreversible environmental damage, it also inevitably provides a hotbed for rampant corruption.

Its been said that “there is at least one corrupt official for each kilometer of highway built”, after 62 officials in Liaoning were convicted of corruption in 2003 relating to the construction of a 50-km highway linking Shenyang and Shanhaiguan.

“But it is a game some officials like to play because it boosts local GDP, which has long been a key criteria for promotion, despite Beijing’s repeated calls for green growth.” In the past, where Wenzhou had led, the rest of China has followed. Its current troubles may therefore turn out to be a forerunner of wider problems in China’s economy.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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