STRATFOR's
Global Intelligence Update
June 30, 1999
Evidence of Continued Weakness in Chinese Economy
Summary:
The Chinese economy continues on a downward trend reflected and
amplified by falling foreign direct investment. Beijing's latest
strategy to remedy this situation and restore foreign confidence
in the Chinese economy is by encouraging domestic consumption and
investment. The problem is, Chinese citizens are not going along
with the plan, preferring to deposit their savings in the
perceived safety of banks, despite recently slashed interest
rates. Far from riding out the Asian economic collapse and
preparing for brighter days, China has merely delayed the full
impact of that collapse into which it is now being dragged by
declining foreign and domestic confidence.
Analysis:
According to the June 29 issue of Asia Pulse, China's State
Statistics Bureau reported that exports in April fell 7.3 percent
versus the same period the previous year. Fixed asset investment
by the public and other sectors of the economy fell by 7.7
percent, month on month, in April. And while the consumer price
index fell by 2.2 percent and the retail price index fell by 3.5
percent in April from the previous month, retail sales were
relatively unchanged from March. According to a June 25 report by
China's Xinhua news agency, citing State Administration of
Internal Trade figures, retail sales fell 1.7 percent in May from
the 7 percent growth of the preceding four months. Where money
in China is going is clear from the Statistics Bureau report that
bank savings by individuals stood at 5.84 trillion yuan, up 0.4
percent from March and 19.2 percent versus the previous April.
China's official International Business Daily, citing trade
ministry figures, reported June 28 that paid-in foreign direct
investment in China fell 6.6 percent and pledged foreign
investment fell 17 percent in the first five months of this year
from the same period in 1998. The daily attempted to put a
positive spin on the figures, noting that paid-in foreign
investment in May was up 15.6 percent from May 1998, the first
monthly increase this year. However, paid-in investment in
January through April of 1999 was down 12.6 percent year on year.
Approvals of new foreign-funded enterprises in China were down
13.6 percent during the first five months of 1999 from the same
period the previous year. The Economist Intelligence Unit
expects paid-in foreign direct investment in China to drop to
around $30 to $35 billion in 1999 -- the lowest yearly amount
since 1993 -- from $45.5 billion in 1998. Beijing reportedly
cited the Asian economic crisis, a global slowdown in investment,
turbulence in the international financial markets, and slow
growth in the Chinese economy as the culprits behind the downturn
in foreign direct investment in China.
Prime Minister Zhu Rongji's strategy to lift China out of this
slump is to attempt to stimulate domestic investment and
consumption. Chinese media have touted the recent increases in
China's stock markets, expressing the hope that the bull market
will attract domestic investment and the ensuing returns from
those investments will launch a consumer spending surge. A front
page commentary in China's official People's Daily on June 15
called the rally that saw China's stock markets skyrocket 80
percent in six weeks "sustainable," and urged Chinese to invest
still more. Beijing sparked the rally by cutting transaction
taxes on some shares and by creating two new mutual funds. China
is also apparently turning a blind eye to domestic companies
illegally routing money through Hong Kong and back into the
Chinese stock markets.
To encourage both consumption and investment, China slashed
interest rates for the sixth time in three years. Effective June
1, the Peoples Bank of China slashed the average interest rate
for bank deposits by one percent and the average interest rate
for loans by three quarters of a percentage point. The benchmark
lending rate now stands at 2.25 percent. In a report to the
National People's Congress on June 26, Finance Minister Xiang
Huaicheng announced plans to increase China's economic growth by
raising salaries, adjusting taxes, encouraging exports and
domestic consumption, and attracting foreign investment. Xiang
warned that revenue growth could slow in the second half of 1999
unless weak domestic demand and capital spending and declining
exports were effectively addressed.
The trouble is, the strategy is not working. According to a
survey by the Beijing-based Investigation Institute on the
Chinese Economy, released June 29 by China Daily, about 56
percent of urban Chinese are choosing to maintain or expand their
bank savings, while only 8.2 percent have put money into China's
stock markets. Only 36 percent of the respondents said they
intended to withdraw any money from their bank accounts. Most
cited upcoming education, housing, and medical expenses as the
reason for their reluctance to invest or spend. Additionally,
some 30 percent of those surveyed expected their income would
grow slower over the coming year. Left unspoken was the fear of
unemployment and mistrust of China's stock markets, and the
survey did not address the spending habits of China's rural
population, which does not have much disposable income anyway.
The fear of ongoing labor cutbacks and slow growth has also made
Chinese banks reluctant to lend, thereby contributing to stagnant
consumption.
Beijing has blamed slow growth in the Chinese economy for turning
away investors. To address this, Beijing is attempting to spur
domestic investment in stocks, thereby pumping up the equity of
Chinese companies and making it easier for them to borrow on the
international market and to lure foreign investors. Beijing is
also hoping that a surge in consumer spending will make
investment in China more attractive. But, China's fundamentals
weigh against dramatic increases in foreign investment, and its
barefaced attempt to improve the national balance sheet by
inflating equity values -- reminiscent of similar attempts by
other Asian countries to artificially inflate real estate values
-- is unlikely to inspire foreign investment. That is even
assuming that Beijing is able to drum up more domestic interest
in the markets, something not altogether apparent at this time.
And as its stock market rally runs out of steam in the face of
lackluster foreign and domestic interest, China may see a major
reversal in the markets, only amplifying its problems.
China's difficulty attracting foreign investment illustrates the
fact that what Asia is currently experiencing is a cyclical
upturn in a secular downturn. While some Asian economies may
truly have bottomed, either because they did not have far to fall
or because they underwent some degree of painful but necessary
reform, many have far more room to fall. Those countries that
have dealt less ruthlessly with their financial problems, which
have not imposed stringent reforms, are merely experiencing a
temporary respite from their downward trend. We think
particularly of China -- struggling to bolster its balance sheets
with domestic investment and consumption, Japan -- addressing a
banking crisis by nationalizing the problem and using all means
including make-work programs to lower the rate of unemployment,
and Malaysia -- whose resort to restrictions on capital flows
expires in September.
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