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Sunday June 7 8:02 PM ET
China's economic engine sputters
By Kari Huus, MSNBC
Beijing - Xia Chunhai didn't need the statistics bureau to tell him Asia's financial crisis had hit China. Until last week, he and 30 other Chinese workers were employed by South Korea's Dong-Ah Group to build a water project in Libya. Dong-Ah went belly up and Xia was heading home to the far north of China. "First they cut salaries and then they cut jobs," Xia said, hoping his old factory in Qitan would take him back. But after two years away, Xia's job prospects in China are not looking all that promising.
True, China's economy grew at an enviable 7.2 percent clip in the first quarter, a far cry from the recessionary pits that many of its neighbors have fallen into 11 months after a currency crisis sent the region into a downward economic spiral.
But analysts say that China too is facing a less-than-rosy economic future. And they say China's prospects for meeting the 8 percent growth rate it targeted for the full year are slim at best.
"We are going to see this economy go south," says James McGregor, head of the American Chamber of Commerce in Beijing.
That's particularly bad news given China's ambitious plan to restructure age-old state-run enterprises. By trimming, or even shuttering, those factories and businesses, millions of employees are being put out of work. Already, 12 million people have been laid off, according to a Beijing-based bankruptcy lawyer with close ties to the government. And July 1, the pressure on those workers will increase as China formally scraps welfare housing for 110 million urban state employees and their families. If all goes well, those out-of-work workers will be quickly absorbed into new jobs created by the country's - hoped-for - robust economy.
Premier Zhu Rongji is betting that a new commercial housing market (starting with the sale of state housing to workers who occupy it) will spur employment opportunities in construction, transportation, banking and insurance. "The housing industry is the key and will stimulate growth," analysts Dong Tao and Sam Wong wrote in a new report by Credit Suisse First Boston. "This could be a booming sector for three to four decades."
But the bankruptcy lawyer is not so optimistic. "Things will get worse before they get better," he says.
Part of the problem is that China is quickly losing some of its competitive edge in exports to its neighbors as currency after currency - from Indonesia's rupiah to Hong Kong's dollar - get pounded on world markets. The result is that China's cheap labor market doesn't look all that cheap anymore compared to the exports of its neighbors that are denominated in sharply devalued currencies. The difficulties are not limited to manufactured goods alone.
On Thursday, the People's Daily reported that agricultural exports in the first quarter dropped by 6.9 percent from the same period last year because of Asia's financial crisis, seriously carving into the income of farmers.
The bankruptcy lawyer, who asked not to be named, said that Chinese banking officials have told him they are considering a 7 percent devaluation of the yuan in the second half of the year to reclaim some of the competitive advantage. Still, while the government's official line is that it will not devalue, the concern is evident.
"I appreciate the attitude and effort to maintain the value of their currency," Asian Development Bank (ADB) President Mitsuo Sato said Thursday. A cut in the yuan's value could spark a disastrous round of competitive devaluations and a trade war, Sato warned.
Already, some signs of economic deceleration are obvious: China's industrial production has tumbled, tourism revenues have fallen and retail sales - which grew by 37 percent at their peak in 1994 - advanced by just 6.9 percent during the first quarter.
Most concerning, however, says a Western diplomat, is that direct foreign investment has fallen off - especially from old standbys like South Korea.
The Koreans were investing heavily in the northeast of China, a heavily industrial area that was dominated by the state sector and wasn't seeing a lot of other foreign investment inflows, the diplomat said. "The impact exceeds the dollar amount," especially during this period of state enterprise contraction.
Beijing is scrambling to keep its vital signs strong. It has promised a three-year, $750 billion infrastructure spending program. And it has lowered interest rates and reduced reserve requirements. The government's tourism administration has called on tour operators to focus on stronger markets like the United States and Taiwan to make up for the sharp declines in arrivals from South Korea, Thailand, Japan and Malaysia.
The Yangcheng Evening News reported that the Civil Aviation Administration of China has ordered airlines to delay or cancel deliveries of new planes to save money.
"Zhu Rongji knows he has a year, tops, to turn this economy around," says McGregor of the Chamber of Commerce.
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