China+Economy

 A SMALL stretch of land, a two-hour drive from end to end, reveals much about the economic transformation of a vast country. This slice of southern China runs from Guangzhou, the old treaty port reserved for foreigners before Mao expelled them, to Shenzhen, the city established after Mao’s death as an experiment in private enterprise. Over the past decade it has become one of the world’s fastest-whirring economic engines—a global hub in the manufacture of clothing, shoes and electronics—serviced by tens of millions of migrant workers. Now the region is undergoing an equally remarkable contraction. In the past year thousands of factories, perhaps one-third to one-half of the total, have closed. Reliable statistics are hard to come by, not least because many factories operate in a legal netherworld, but the severity of the slump is plain. The flow of migrants has gone into reverse. Some of the newly unemployed have stuck around (and a few have started a new industry: street crime). The lucky ones have found work at factories that moved inland, although at lower pay.
 * China Economy ** 2/24 Aubrey Faust
 * Lead-in anecdote **(from China Business: Time to Change the Act from the //__Economist__//

On the road through Dongguan, a sprawling industrial city roughly halfway between Guangzhou and Shenzhen, building after building—residential as well as industrial—displays red banners advertising its availability. Local agents say there is no interest from buyers. A lack of demand for whatever a factory might make is part of the explanation. So is concern about the quality of properties for sale: a lot of factories were put up in a hurry and have been maintained poorly if at all. And so is the nebulousness of Chinese property laws. Purchasers cannot be sure that what they buy they will truly own. 
 * Statistics (from Economist): **

The economist predicts a 6% growth rate for 2009. Government maintaining morale is key.   **Positive**: **Negative**:
 * 8% is the amount in the often-cited theory of what China's economy needs to grow by to prevent rising unemployment and, in turn, social unrest.**
 * Chinese bank lending surged by 21% in the year to January
 * Share prices have jumped 30% since November
 * <span style="font-size: 12pt; font-family: 'Times New Roman','serif';">Exports were 17.5% lower in January than a year before. Imports were down by 43.1%.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 12pt;">Half of China’s 9,000 or so toy exporters have gone bust.
 * Thousands of factories in southern China are now abandoned.
 * 20m migrant workers from the countryside have recently lost their jobs
 * 43.1% decrease in imports compared with a year earlier
 * 17.5% decrease in exports


 * Things the Government is doing:**
 * 1) **Stimulus package**
 * 2) <span style="font-family: verdana,geneva,arial,sans serif;">$585 billion- the government will provide 30%, banks will provide the rest
 * 3) Consists of fiscal spending and tax breaks.
 * 4) **13% discount** on goods for rural people
 * 5) It was due to end last year, but was extended due to the economic crisis in an attempt to help businesses. It is to run for four years.
 * 6) **Why?** "The government has expressed great hopes for rural spenders as a new engine of economic growth. Hence the subsidy scheme: get peasants to spend, goes the official thinking, and the country’s ailing export industries will find a vast new market. The idea was to reduce the household-appliance industry’s bloated capacity and reliance on exports for half its sales."
 * 7) **Successful?** "Its impact so far is hard to assess from patchy official figures. In the first three provinces [it has now been extended to the entire nation], the volume of rural sales of household appliances of all kinds in the 11 months ending October 2008 was 40% higher than in the same period a year earlier. But the //Economic Observer//, a Beijing newspaper, said the sales value of designated products was only 40% of the government’s target."
 * 8) **Complaints:**
 * 9) Shouldn't just be for rural poor
 * 10) Its impact on free competition in the market (favors some companies/products)
 * 11) **Suggestions for other ways:** some have suggested it might be fairer and less bureaucratic to give coupons to rural residents to spend as they want, as has been tried in Taiwan.


 * Economist Suggestions for Other things to Do:**


 * Increasing government spending. China's most likely next policy move would be a further increase in central-government spending. After all, the government's fiscal position remains healthy: the fiscal deficit for 2008 was an estimated 0.1% of GDP, while total government debt was equivalent to just 15.9% of GDP. However, by choosing to boost economic growth through a short-term drive to accelerate construction-related projects rather than by attempting to raise private consumption, the government would risk aggravating the economy's bias towards investment at the expense of consumption. There is also a risk that some local governments will indulge in wasteful projects, as caps on their spending are relaxed.
 * Expanding credit availability. Another option would be to encourage even faster credit growth from the banking sector. Indeed, this is already happening. After policymakers abandoned the commercial banks' lending quotas at the end of 2008, credit growth has rebounded, reaching a four-year high in December of 19% year on year. Unlike most banks in the West, China's main commercial banks have not been on an irresponsible lending spree and are in a relatively healthy financial position. Of course, while such a strategy may support growth in the short term, there is a big risk that expanding loan growth at a time of a steep downturn in the domestic economy will result in many more loans going bad in the future. That would reverse the hard-earned progress Chinese banks have made in cleaning up their books in the past several years.
 * Boosting consumer spending. The ideal solution for the government would be to promote higher consumer spending, by rebalancing the economy away from its dependence on exports and investment and towards private consumption. One way of doing that in the short term would be a tax rebate, which would put cash directly in people's pockets. However, a problem for any measure that raises consumers' disposable income is that a large chunk of the increase is likely to be saved. As a result, to achieve a true rebalancing of the economy, what is needed are government policies that reduce the incentive for households to save. Currently, fears of being forced to pay out-of-pocket for healthcare expenses, as well as the spiralling cost of education, are the main reasons why household-savings rates are so high. More investment in health and education is therefore desperately needed.
 * Improving competitiveness. A less-ideal option for the government would be to attempt to boost exports by making them more competitive. This could be done by either reducing costs, or devaluing the currency. Costs could be cut by undoing some of the reforms the government has introduced over the past few years to move China up the value-added chain and reduce its dependence on low-value added goods. For example, authorities could relax the enforcement of the Labour Contract Law, which was introduced at the start of 2008. Although it was meant to provide greater protection to employees, the policy is widely acknowledged to have added approximately 20% to employers' labour costs. Currency devaluation would be a more controversial option. In 2008 the renminbi appreciated by 9.5% against the US dollar, and by even more against most of China's Asian neighbours, resulting in a significant loss of competitiveness for the Chinese economy. However, the reason why exports shrank in the final two months of 2008 was a slump in global demand rather than a loss of competitiveness caused by the stronger currency. A devaluation remains highly unlikely. But if the outlook for the domestic economy continues to deteriorate, the government may be tempted to allow the currency to weaken. Such a policy would be extremely risky, since it may encourage another round of regional currency depreciations and increase the chances of a trade war.