Everything Is Going To Plan

Business, China, Company Strategy, Economics, Europe, Japan, Sustainability, US

china2.jpgBy John Richardson

So far so good – everything is going to plan.

The flash Markit/HSBC China Purchasing Managers’ Index (PMI) for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first since October last year and sending Asian financial markets sharply lower.

But, crucially, as Reuters pointed out in this article, the PMI also indicated a stable employment market.

“Although Chinese media has reported that a record 7 million graduates will join the labour force this year, there are few reports of widespread discontent among job hunters,” wrote the wire service.

The impact of the one-child policy, although creating huge long-term challenges for China, has given its new leaders the leeway to implement vital economic reforms.

Maintaining a healthy jobs market is crucial for the legitimacy of the Communist Party.

Demographics were very different back when in 2008/2009, when the working population was still on the rise. Thus, Hu and Wen, the previous president and prime minister, felt that they had little choice but to launch a huge economic stimulus package in response to the Global Financial Crisis, as some 20 million migrant workers had lost their jobs.

As long as employment is not threatened, the transformation of China’s economy to one that is much more dependent on domestic demand can continue.

The blog does worry, however, that the situation could change if currency wars break out. China has already indicated that the Yuan might have to be weakened. Given its huge overcapacity across many industries, it might end up exporting deflation.

But, as we said, so far so good.

Everyone needs to get behind China, as the long-term opportunities which would be created by much-more sustainable, domestic-driven growth are enormous.

Take the proposed reforms of the Hukou residency system.

China plans to spend 40 trillion yuan ($6.4 trillion) to bring a further 400 million people to cities over the next decade, according to this second Reuters article.

There are also already 200 million rural residents who work in cities as migrants.

But the problem is that the Hukou system denies these migrants access to free, or heavily subsidised, healthcare and education. Thus, they spend much of their incomes on these services.

China’s planned reforms of Hukou would give migrants much greater access to cheaper healthcare and education.

Do the maths. Two hundred million, plus a further 400 million, equals a huge increase in chemicals and polymers demand, if all of these migrants are given more disposable incomes to spend on consumer goods.

But China can only afford to change Hukou if it achieves overall economic reforms, including interest-rate reform and root-and-branch changes to the tax system and how local authorities raise money.

A panicked return to the failed stimulus policies of the past would be a disaster, as it would worsen China’s bad debt, environmental, corruption and income-inequality problems. Policy reversal could, ultimately, even lead to economic collapse.

And so any chemicals and polymers company with a long-term vision should be careful what it wishes for over the short term, and should plan for lower growth if, hopefully, the adjustment process continues.

The crucial question, of course, remains: How much lower might growth be during the rest of this year?

“UBS this week downgraded its 2013 [GDP] growth target for China to 7.7% from 8%, and Societe Generale is in the midst of lowering its estimates. Bank of America-Merrill Lynch cut its China 2013 growth forecast earlier this month to 7.6% from 8%,” added Reuters in the above first article.

“If the economy meets the government’s growth target and expands 7.5%this year, it would still be its worst performance in 23 years.”

But real, underlying growth could be even weaker, as electricity consumption has increased by just 5% so far this year, according to fellow blogger Paul Hodges.

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