-
- 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.
-
-
- STRATFOR.COM 504 Lavaca, Suite 1100 Austin, TX 78701
Phone: 512-583-5000 Fax: 512-583-5025 Internet: http://www.stratfor.com/
Email: info@stratfor.com
|
