Following was kind of a downbeat assessment of the Chinese economy, What do you think?
> >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. |
