The beginnings of a disintegrating China - Part II

Part I here.

Trade fairs and the future

Trade fairs throughout China set the tone for the following year’s production and export market, the largest in the country being Canton Fair in Guangzhou, concluded November 2008. The number of buyers from Europe and the United States dropped by more than 30 per cent from last year's levels. Trade volume at the annual event dropped by about 15 per cent to 17 per cent from last year amid global recession worries.

The Yiwu International Commodities Fair and China - ASEAN Expo reported similar results. These shows are a showcase of Chinese Commodities focusing on machinery and equipment; electronics and electrical appliances; building materials and household ware; agricultural materials, produce and foodstuffs.

The downward trend is obvious, and now manufacturers are trying to save themselves. With decreased orders, rising production and rising labour costs, manufacturers are cutting more corners wherever possible.

As well as cutting staff, companies are trying to use energy and raw materials more efficiently, and are seeking out alternative, lower-cost suppliers. From my own experience, Chinese firms already seek out the lowest cost supplier and purchase one-off lots to reduce costs; I really don’t see how they could achieve further cost reductions using this method. One unique approach is promoting and selling products online, a virtual store with no office rent to cover, and another tactic is downsizing the office into your own apartment.

Just as overseas and domestic demand slacks off, I wonder when the multinationals will start trimming their China office staff as a way to save money in the head office abroad.

Economic fallout

The fall-out will be highly concentrated in provinces such as Guangdong, Zhejiang, Jiangsu, Shandong, and Fujian all the way up the east coast stretching back the production and supply chain to the Special Economic Zones (SEZ’s) in the western provinces. Nothing will go untouched as this export driven economy is a tight spider web of endless links to supply the greatest economic growth in history, and now perhaps the greatest reversal.

To an unprepared, reactive country the crisis will come in many ways that are not only financial, but societal as well. The question is not whether the crisis will come to China, but rather how China is prepared to deal with it.

As I recently read in a blog: “China has been a country littered with crises of large scale. They have dealt with crises before like the Cultural Revolution which ripped the fabric of society, several famines and the Japanese invasion in the last century.”

That was then, this is now. Around Guangdong Province impromptu protests by disgruntled workers left jobless and without pay are becoming more common; they have resorted to petitioning local government officials for back pay because they have few other ways to be compensated. They will complain more and they will protest at local government offices, and you will see more demonstrations and picketing. Riots related to land grabs, bank failures, forced relocation and protests to close polluting factories were estimated at 70,000 last year, now add in this new “wave” of social movement and anything is possible.

Chinese crude demand

Just when you thought there may be a let-up in Chinese oil demand because of the slowing global economy; think again! This China Daily article, “Calls to pump up nation's oil stockpile,” and states that the country should take advantage of the record drop in global crude oil prices to build up more reserves. “Compared with the highest prices in July, crude oil prices have dropped by 50 per cent. We should take advantage of the low prices to build more oil reserves.”

If you have been asking yourself throughout this article, "Why don’t they just spend part of their two trillion dollars in foreign currency reserves to keep things going?", keep in mind Chinese currency reserves are 80 per cent US dollars and 20 per cent euros and the government can’t purchase items priced in different currencies at will. They would first have to sell dollars and then re-buy another currency, and that’s bad for China. If the dollar drops then the effect will be intensified as fewer US orders will come in. The most obvious choice is to buy something useful and already priced in US dollars; I think you know the answer.

Restructuring the future

The parallels between China’s precarious social and economic future, based solely on exports and our own society’s entire dependence on fossil fuel as a driver for growth, are striking. China now needs to focus on what’s beyond expanding its economy through exports and manufacturing, while all of us need to focus on what’s beyond growth in a crude oil based economy. Peak oil is occurring now, the economic repercussions are a symptom. China is affected, the world is affected, we are all affected. Now the emphasis needs to be more on what to do after the peak.

We have come to the end of the line in terms of endless economic growth based on cheap, readily available crude oil. China has come to the end of their growth in this phase of industrialisation for the same reason. The world has been the economic driver for China and China the economic driver for the world; both were based on cheap energy and disposable income derived from cheap energy, that time has passed. We need to find ways to be proactive for the future instead of reactive. My gut feeling is that within three to six months we will begin to see events on a level no one has anticipated. When it becomes impossible to find work in China during the “economic miracle” we will have truly entered the end of the age of oil.