Ramsey, Mqurice, or anyone!
I received this from a group that does alleged "intelligence" reports. They are usually negative, so take that into consideration. What is your take on this, and possible problems for "de Q"?
John
STRATFOR.COM
Global Intelligence Update
August 19, 1999
China Battles Deepening Economic Depression
Summary:
China has announced that it is placing caps on the production of a
range of consumer goods, after price floors and export subsidies
failed to halt plummeting prices. Plagued by declining consumer
confidence and abysmal domestic demand, China is turning to ever
more radical moves to battle its economic depression. It is
running out of options. Devaluation is clearly next on the table,
but beyond that there remains only the more draconian steps of
direct state control, with the accompanying purge of "economic
criminals."
Analysis:
In an effort to halt plummeting prices, China's State Economic and
Trade Commission announced a ban on all new projects, involving the
manufacture of a broad range of consumer products, Xinhua news
agency reported on August 18. The ban would begin on September 1,
and includes products ranging from video compact disk players,
microwave ovens, refrigerators, and air conditioners, as well as
bicycles, toothpaste, plastic bags, candy, salt, apple juice, and
liquor. China's domestic market is stagnant, with citizens worried
about looming unemployment stashing their money under mattresses
rather than spending it. With a glutted market, China's producers
are slashing prices, thus threatening to make those unemployment
fears come true by driving themselves into bankruptcy. Beijing has
already attempted to slow the deflationary spiral, imposing price
floors on some products.
China is stuck in a crisis of overproduction and underconsumption.
Consumer confidence has collapsed, and with it domestic demand.
Meanwhile, despite generous tax subsidies on exports, China has
been unable to export its way out of the crisis. Beijing is not
done trying. According to an August 18 report by Xinhua, China's
Eximbank will give priority in issuing credit to the export of new
materials and new high technology, including machinery and
equipment, consumer electronics, and textiles. The bank will
reportedly ease its lending standards, loaning to large and medium
-sized state-owned enterprises that are currently operating with
"temporary losses," and contemplating offering no-guarantee loans
to large conglomerates with good credit. Additionally, Xinhua
quoted Eximbank president Yang Zilin as saying the bank would give
priority to infrastructure projects and to central and western
China in the distribution of loans from foreign governments.
China has also announced it is placing an embargo on any further
construction of luxury apartments, hotels, department stores, and
office buildings. The decline in demand extends to real estate,
and China is facing a glut in that market as well. According to
the Associated Press, the once booming coastal city of Shanghai has
office-vacancy rates of up to 70 percent. The boom that has dotted
Shanghai's skyline with cranes and new buildings has gone bust, and
if Shanghai cannot attract business tenants, China's interior can
only be in full economic reversal.
Despite rosy estimates of economic growth, China is in a
depression. If it can not sell the products it is producing at
home or abroad, even honest accounts of growth in industrial
production point to nothing but the sickness of China's economy.
Letting market forces reconcile themselves is unacceptable to the
Chinese government, which is terrified at the social unrest that
could be unleashed by high unemployment. Chinese President Jiang
Zemin, currently on a tour of troubled SOE's in northeastern China,
has called for the development of those enterprises. Rather than
release these large employers to their market-driven fates, Jiang
has ordered that they be propped up.
The Eximbank's loan targets mark a continuation of de facto
devaluation, subsidizing exports and pumping money into
infrastructure. The bank is also distributing money to China's
economically lagging central and western regions, rather than to
centers of economic growth on the coast. Priority in Chinese
economic decision-making has all but abandoned Western market
strategies, and has been given over to maintaining social
stability.
Price floors have not boosted consumption. Tax subsidies have not
boosted exports. Production ceilings are now in place, though
layoffs are out of the question. Exports are being further
subsidized by loans all but expected to fall victim to default.
And devaluation looms on the horizon. This option, recently
supported by Asian economic iconoclast and Malaysian Prime Minister
Mahathir Mohamad, who is currently meeting with senior leaders in
China, offers the possibility of generating inflationary pressure -
pumping more money into consumers' hands. It could also make
Chinese exports more competitive. The likely outcome, in a time of
economic instability and fear, is that more money will be hoarded.
China is running out of options. If devaluation does not work,
there is still the potential for internal currency controls - an
option potentially catastrophic for China's foreign joint venture
partners and foreign companies registered in China, using Chinese
banks, and trading in yuan. And along with greater state control,
there is the opportunity for recriminations. China has already
declared war on corruption, prosecuting some 244,000 "economic
crimes" in the first half of 1999 - a 28.6 percent increase over
the first half of 1998. Beijing's piecemeal attempt at economic
reform without social disruption has failed. Now comes the
crackdown and an attempted return to central control. |
