The Rudd strategy Part II: just how good is China's economy?

Australia's reliance on China's economy

Despite a lack of clear evidence that the global economic crisis will not worsen, the Rudd Government is confident that China's ongoing demand will continue to drive our resources sector, contributing to state and federal coffers and offset any downturn.

Is Rudd relying on China's US$1.9 trillion foreign currency reserve substantially insulating it from the global crisis?

China in the global economy

China is a huge assembly plant, importing components, energy and raw materials to produce goods for export, reliant on high volumes and low margins. While it earns trillions in foreign exchange, re-exportable content is in the high billions.

China distorts the "level playing field" in world trade with a range of subsidies including those paid to state-owned petroleum refineries forced to sell petrol, diesel and refined petroleum products well below cost. In 2008, Sinopec received billions of dollars to protect its bottom line. Subsidies paid to PetroChem were not disclosed. Private refiners received no subsidies and shut down operations to avoid losses.

Many state-owned enterprises operate at a loss just to earn foreign exchange and provide employment, losses concealed by off balance sheet accounting.

2009 growth estimates

Pre crisis, China accounted for about 5 per cent of total world GDP. The USA accounted for 28 per cent.

China also accounts for roughly 12 per cent of global manufacturing. Domestic demand however, accounts for just 43 per cent of China's GDP. America and Europe consume more than 40 per cent of China's exports.

China's 2008 third quarter GDP growth slipped to 9 per cent on the back of successive monthly declines, the lowest since 2003. China's export growth rate is estimated to plummet from 21 per cent in 2008 to a low of 10 per cent in 2009.

Factory closures

Guandong is the major centre for export manufacturers which employ about 10 million.

In the first seven months of 2008, safety standards non-compliance closed over 50 per cent of China's toy exporting factories.

New credits restrictions are severely impacting on the supply chain. Exporter's who once received payment ex-factory, are now giving 90 days credit and warehousing surplus stock.

Closures range from global brands to component manufacturers: 18,000 of the 70,000 Hong Kong owned factories will close following deliveries for Christmas and Chinese New Year orders. Some will close earlier.

An initial 2.7 million jobs are estimated to disappear. Demonstrations by sacked workers demanding unpaid wages are increasing.

Mining and heavy industry are also suffering

The shut down of heavy industry and power generation to reduce pollution during the Beijing 2008 Olympics is blamed for the steel industry slowdown. The real causes however were evident in June 2008.

Steel

China produces 40 per cent of the world's steel.

Construction, household appliances and the car industry are China's major domestic steel consumers. The property sector alone consumed 38 per cent of that demand.

Restructuring the steel industry, improved efficiencies, fierce competition between the new giants and steadily declining demand resulted in oversupply and plummeting steel prices. Since June 2008, ore stockpiles were increasing at terminals and steel mills. Suppliers were asked to delay shipments. Brazil shipments have almost ceased.

By mid September domestic steel prices had dropped by 37 per cent and spot prices dropped 44 per cent.

Major steel mills in the north, central and south are cutting production. One Hebei group cut production by 20 million tonnes, (35 million tonnes iron ore equivalent). A further 20 per cent cut is forecast November/December. Another Hebei mill shut the furnaces and sent workers home.

Facing operating losses of US$150 per tonne, commissioning of the new hi-tech Caofeidian steel mill is delayed indefinitely.

Coal mining

Like steel, China's coal industry is also undergoing major restructuring. Thousands of smaller mines are closing adding to unemployment.

New huge mechanised open cut steaming and coking coal mines are opening in Inner Mongolia and Mongolia. Dedicated heavy duty railways connect the mines to major industrial and power generating bases in China reducing transport bottlenecks caused by the endless convoys of trucks and trains from the smaller mines, forcing more closures and layoffs.

What is China's consumer economy

China's 1.3 billion population is considered a massive untapped consumer market. The reality however, is different.

Eight hundred million of the 1.3 billion "consumers" are categorised as rural peasants. Add to that the hundreds of millions of low paid urban workers and unregistered individuals. China also has the world's largest rapidly growing aged population.

There is also China's rapidly widening rural-urban wealth gap. About 600 million Chinese live on less that US$2 per day. National per capita income is about US$2,000. There are no pensions, social security net or adequate health care for this category. Any cash not used on bare essentials is hoarded for medical care and old age.

Despite China's proclaimed massive exchange reserves, little is done to improve health care infrastructure or provide for a basic national social safety net.

Declining domestic consumer demand

Even if current growth was maintained, pre crisis domestic consumer spending represents only 40 per cent of China's GDP, well below that necessary to maintain China's planned growth rates. Developed nations spend about 65 per cent.

Disposable income suffered severely from the stock market slide as shares lost 60 to 70 per cent of their value, leaving investors across China with huge losses and many in debt.

The property market slide compounded the problem.

Billions evaporated from the domestic spending purse.

Pre crisis, consumer spending leapt 23 per cent, before plummeting.

Burnt by the stock market, property crash, restricted credit and looming unemployment, China's consumers are bunkering down to conserve cash and hang onto jobs as employers shut the doors or cut staff.

The casualties

These include real estate, cars, computers, mobile phones, TVs, entertainment systems, household appliances, electronic gadgetry and home furnishings. The travel industry is suffering and China's expanded airlines are running low on passengers.

The property sector employs about 10 per cent of the national labour base. Recent government initiatives to boost the property market and construction industry are being ignored despite heavy discounting and finance.

China's three major domestic consumers of steel all cut back, forcing further reductions in steel production.

Unemployment

The Chinese Communist Party (CCP) is paranoid about "social harmony" employment the number one priority.

Increasing environmental degradation and desertification create a continuous flow of environmental refugees comprising the rural poor forced off the land by expanding desserts plus shortages and contamination of water supplies. Millions found employment in the low paying export manufacturing factories, steel and coal operations, construction, huge infrastructure projects and China's foreign operations.

China's solution to prevent rising unemployment from exporting industry closures is to promote increasing domestic demand to offset the decline in exports and maintain the inflow of foreign exchange.

Official unemployment is unrealistically low 4.5 per cent but relates to the target of more than 9 per cent GDP growth. The statistics however are an exercise in manipulation. The exclusions are extensive and unrealistic. Unemployment only relates to restricted categories in urban areas. Statistics for rural unemployed do not exist.

A recent study indicated urban unemployment was around 15 per cent. Factoring in a rural unemployment guesstimate, nationwide unemployment ballooned to 23 per cent.

Twenty million new workers enter China's workforce every year to fill roughly 12 million jobs. Of this, more than 5.6 million are university graduates. Roughly 40 per cent of 2007 graduates are still unemployed. A high percentage in jobs unrelated to their qualifications.

Unemployment will increase as the flow on effect impacts down the line on steel, cement, glass, ceramics, copper, nickel, metal finishing, plastics, chemicals, office and home furnishing and transport industries.

Service industries are already sacking staff.

What is China's real GDP?

China's proclaimed GDP performances have been spectacular, but do they really reflect true value and relevance?

China's financial and banking system lacks transparency. Beijing conceals what it considers "sensitive data", under state secrets classification. There is no independent method of checking crucial agricultural input to GDP. Beijing refuses to reveal full details of its methodology in determining GDP.

Statistics are subject to manipulation at all levels of government. Career advancement is tied to performance, yet those same officials produce the raw data for statistical input.

Unreliable population data also questions GDP credibility when addressing such items as local consumption, unemployment, production efficiencies, energy usage, water demand, the aged, gender imbalance, and so on.

Another key missing from China's real GDP is the level of national debt, concealed by off balance sheet accounting and state secrets classification. This includes the liabilities of China's policy banks, debt owed by state owned enterprises, debt owed by Peoples Liberation Army (PLA) commercial enterprises, subsidies for energy, fuel, water and grain, social welfare and health care provisions to name a few.

Can China's GDP be believed?

World Bank bowed to pressure from Beijing to withhold publication of its Cost of Pollution in China - Economic Estimates of Physical Damages 2006 report.

Despite the pressure, the World Bank released a sanitised version, that included:

… the combined health and non-health cost of outdoor air and water pollution for China's economy comes to around $US100 billion a year (or about 5.8 per cent of China's GDP).

… that pollution and contaminated water were directly responsible for the premature deaths of 750,000 each year.

In 2005, China implemented a Green GDP trial that was shelved when completed in 2007 and access denied.

Late 2006, China's official ratio of debt to GDP was set at 18 per cent, well below the global alarm level of 60 per cent.

An independent 2006 study estimated public debt level was four times that of the official figure, and the debt to GDP ratio should be around 81 per cent commenting:

No matter how you calculate this ratio, China has too much debt.

A 2008 independent report on the impact of environmental degradation on the economy, estimated that air borne pollutants alone cost China US$248 billion (7.1 per cent of GDP for 2007).

Also excluded is the future cost of repairing the damage to China's environment and contribution to global warming. A primary cause is increasing emissions from China's energy expansion program that has commissioned four new 1GW coal fired stations each month since 2004 and continues into 2020. These are not modern state of the art units incorporating efficient emission control.

Multinationals produce roughly 60 per cent of China’s exports, mostly for US and EU markets. Cutbacks are responding to sliding demand.

A decline of 1 per cent in the US economy can trigger a 1.3 per cent decline in China's economic growth.

Applying only part of the green GDP factor plus a 1 per cent slide in the US economy, in real terms, China's recent 9 per cent GDP growth for 2008 is just above breaking even.

No provision was made for any Kyoto contribution or the impact of the economic crisis.

Is China far more susceptible to a melt down than first thought?

Kyoto

China attempts to hold the developed world to ransom, demanding they pay for China's increasing pollution enabling China to utilise the huge environment cleanup cost to fund its continuing growth program.

It will be interesting and educational to hear China's demands in the current round of talks, especially its continuing developing nation status.

How could a responsible government of a developing nation be taken seriously when it recklessly plundered the national coffers for the billions spent on the extravagance of the Beijing 2008 Olympics?

Responsibly used it could have improved the health of the poor and reduced pollution levels that are also impacting China's population and that of its neighbours.

It is time that China comes to the table as a responsible global citizen rather than the grandstanding bully demanding that the west fix the problems that China has created for itself and are now impacting on the rest of the world.

China's reckless "growth at all cost" policy is unsustainable and needs closer assessment by China and the global community.

Where to in 2009?

The Rudd Government needs to determine if China's economy is real, or is it just an image for global consumption and political expediency projected from behind the veil of an opaque economic system and state secrets?

Could in fact China's robust economy be a fragile house of cards built on shaky policies and phantom numbers.

China has proclaimed that it will increase domestic demand by mega infrastructure projects employing a massive labour force and increase domestic product demand.

Mid October however, a cutback in the crucial urbanisation program was announced without detail. Constructing almost two cities the size of Beijing every year until 2020 is now on hold!

Why shelve such an economically strategic project when China is experiencing rapidly rising unemployment and declining export earnings but has US$1.9 trillion in reserves?

Just how good is China's economy?

Just how good is Rudd's knowledge of China?

How well researched is the Rudd Strategy?

A more disciplined and well researched approach would appear more professional and logical than that made on the run in recent weeks producing flawed decisions and panic.

How much consideration has been given to China's reckless drive for continuous growth at all costs that overlooks the laws of economics, sustainability and the finite resources of planet earth and its fragile atmosphere?