The beginnings of a disintegrating China - Part I

These bankruptcies and massive layoffs are not just single events in isolated locations, it is beginning to happen countrywide. The lag time between the events of the western banking system and the fallout here in China is approximately two months. With that said more trouble is on the way. If there is no contingency plan by the communist party for the global downturn within their own society, and if they are reacting to each event rather than planning for such events, then the China we have seen during the last 10 years will be an entirely different place in another two.

Second tier

The second order of business will be restructuring to a non-export driven economy for the next three years until the world works itself out of this financial mess. The only one to speak out so far against the grain of positive news is Fu Ziying, Vice Minister of Commerce, who with some common sense said “It would be more difficult to maintain stable export growth next year because of the global financial turmoil”. As I stated before, most of the fixes for the slowdown seem to revolve around expanding domestic demand, which is the catch 22; demand for exports slows, so if citizens have no job and less money, selling them goods and getting them to spend won’t work. These pipe dreams of China's economic flexibility and macro-control guaranteeing economic stability are exactly that, a dream.

I think a message is beginning to get through with this unfathomable event requiring Government Agency spending be frozen in 2009, halting the average annual 5 per cent increase of the past five years. The Ministry of Finance said last week: "The budgets for next year should be capped at the same amount as this year's and every project would be looked at."

Agency spending includes staff salaries, lavish gatherings and official state business. Expense budgets of all 107 central government agencies will be analysed and related departments asked to tighten their budgets.

Wang Chaocai, vice-president of the ministry's research institute for fiscal science, said “The spending freeze will be achieved by reducing the number of meetings and conferences, reception activities and business trips, and by cutting transport costs”. This is truly astonishing in the land of showing off wealth and status; that’s like asking the Emperor to reduce the party and banquet budget during the Tang Dynasty - unthinkable, unless there is a crisis.

The way I understand it, each department is compartmentalised and deals with that departments business only - the idea of ripple effect is not widely understood in China even at the highest ministry levels. It is widely understood that exports directly affect factory production and workers lose their jobs.

Trying to explain that the copper mine in Jiangxi will need fewer workers and that leads to lower need for rail transport, which leads to a reduction of rail cars and that industry, plus the maintenance crews and repair parts involved to keep it all running; this is a more difficult task. How about the food vendors at the factory gate, the nearby stores and delivery drivers who drive fewer miles and buy fewer tires? There is less vehicle maintenance, which requires far fewer mechanics and spare parts to keep the transportation network by road moving, which is also its own separate industry. This example filters right through ports, construction, real estate, logistics and so on, and it’s all based on producing or transporting something for manufacturing, export and indirectly imports.

Power generation is one of the biggest industries in China, and according to the China Electricity Council “power demand in August fell 5.8 per cent from the slowdown in export-oriented consumption along coastal areas”. This directly connects to China’s largest steelmaker, Baoshan Iron and Steel and the nation’s biggest aluminium producer Aluminium Corp of China, which cut prices for December by as much as 20 per cent in a bid to attract more orders amid a slowing economy (and is considering further cuts because of falling metal prices and weak domestic demand).

Premier Wen Jiabao said on Saturday that fiscal revenue in the fourth quarter of this year will continue to drop after falling from more than 33 per cent in the first half to 10.5 per cent in the third quarter. The World Bank followed with a downward revision for China’s GDP growth next year at 7.8 per cent or lower on reduced spending in consumer markets.

As many areas of the world enter a recession 7.8 per cent sounds great, but in China the working age population is still growing, China needs at least 8 per cent growth to maintain the current employment rate. Where will the three million new college graduates find work this year, after all they are fighting with the surplus of five million diploma holders that still have not found work in the last two years.

The third obstacle

The third obstacle will be restoring confidence in the average citizen’s mind. As the cycle of distrust between employee, supplier and factories intensifies, factories may close because workers leave for fear of not being paid; suppliers will not deliver unless paid cash on the spot at delivery, no more credit. This cycle will lead to an exodus of workers from coastal provinces. I believe that Shenzhen, a city of somewhere between 10-14 million will shrink by maybe half by the end of next year

In a reactive approach as situations occur around the mainland, there have been several new laws introduced. The Communist Party of China (CPC) issued a landmark policy document on October 20 allowing farmers to: "lease their contracted farmland or transfer their land use right to boost the scale of operation for farm production and provide funds for them to start new businesses.” This is the first firm confirmation that tens of millions are going back to the countryside.