On Sunday, the third and final session of this year’s Canton Fair opened. By the time China’s biggest—and most closely examined—trade show closes on November 6, exporters will post big declines in orders even though the event is the largest ever. Empty aisles at the Fair indicate that next year China, now considered the world’s factory, will have zero or negative export growth.
Declining exports will be a large problem for Beijing: an astonishing 38 percent of its economy is attributable to sales to other countries. Today, as shoppers around the world react to the global financial panic, China optimists have abandoned their exports-will-power-Chinese-economic-output arguments and embraced a new mantra: consumer spending and Chinese government investment will save the day. It’s time to look at these newly devised arguments.
Hopes placed on consumer consumption are misplaced. China’s 1.5 billion people are known for their propensity to save—each year they sock away about 40 percent of their income. Analysts like to say the Chinese generally save because saving is deeply ingrained in their culture. Perhaps. But there are other factors. Early this year Chinese citizens began to save even more due first to inflation and then in reaction to economic crisis both at home —especially falling real estate prices and stock market valuations — and abroad.
Moreover, it is clear they also put away large amounts of cash in response to government incentives, and since July those incentives have been getting stronger rather than weaker.
The incentives are getting stronger because the central government is trying to encourage exports and export incentives inevitably discourage consumption. For instance, Beijing stopped the appreciation of the renminbi this summer to preserve the currency’s artificially low level and thereby make sure its exporters kept their large cost advantage. This tactic, among other things, makes imported luxuries more expensive than they should be, thereby cutting down on consumption.
Today, consumer spending accounts for about 35 percent of the economy. As The New York Times noted at the end of last month, that’s “probably the lowest share in any country in the world.” And spending will go even lower as new college graduates cannot find work—about 80 percent of them are unemployed—and Chinese workers lose their jobs. Yes, there’s room to eventually boost consumption, but Beijing cannot count on its citizens to spend the country to prosperity at this crucial moment.
The last leg to the Chinese economy is investment, and much of this investment is attributable to government stimulus. Beijing has ready cash—it is, after all, sitting on what has been described as “the greatest fortune ever assembled”: $1.9 trillion of foreign exchange reserves. Yet forex reserves are not a good source of funds for investment. First, the central government accumulated this mountain of money by issuing debt. So it’s not as if the reserves are really Beijing’s cash. Second, foreign exchange has to be converted into local currency before it can be used inside China. This conversion tends to drive up the value of the renminbi and, therefore, undercuts the competitiveness of Chinese exporters. These days, the central government is loath to do anything that will result in the closure of even more export factories.
There, are, however, more fundamental problems with investment as an answer to China’s sliding economy. First, Beijing has been pump priming with great enthusiasm since 1998. The country needs rail lines and roads in the countryside, but many areas are already overbuilt, saturated with monumental government projects. In my father’s dusty hometown, for instance, there is an 18-story hotel with more than a thousand rooms—almost all of them empty in high season—and a large park—usually deserted—celebrating longevity. Eventually, as Japan has learned, inefficient and wasteful spending catches up with an economy.
Second, Beijing cannot just push a button and churn out eight-lane highways. Grand—and expensive—projects take time to conceive, plan, and build. China’s economy is turning down now and needs immediate help.
Investment is the only thing that can compensate for the export decline and sluggish consumerism. But it is a slim reed. Last year, the country enjoyed 11.9 percent growth according to official statistics. Now, Beijing analysts are quietly saying that growth next year will be five to seven percent, which means it will really be three to four or even one to two. China’s economy is heading down fast.