China. Stagnation? Not yet. (Not yet?) March 2018 issue

China Stagnation China’s growth was brought about by both cheap farm labour moving to cities and two generations of post war baby boomers. And today, the Chinese are not consuming enough – one big reason for an oversupply in their domestic market

China. Stagnation? Not yet. (Not yet?)

In the three weeks leading to July 8, 2015, stock markets in China blew up 14 Greeces in market value! There is every reason to believe the Chinese stock market is a perfectly acceptable indicator of its citizens’ expectations from the country’s exports.

Steven Philip Warner | The Dollar Business


A deluge of frantic arguments and fickle narrations have of late been thrown on our desks and shown on the idiot-box in connection with two nations. One rigged-yet-popular, the other, loved-by-gods-yet-bullied-by-men. In the three weeks leading to July 8, 2015, stock markets in China blew up 14 Greeces in market value! So, let’s focus on a $7 trillion economy and push aside a debt-laden economy – one that accounts for less than 0.1% of India’s exports and 0.03% of imports – as another case of brazen idiocy on the part of its ‘eurosceptic’ political heads and subtle infatuation of both the Troika and Merkel with the ‘economic-nuke’ button. So, let’s talk China.

China has been in news in recent weeks for two reasons. One – the wipe-out of over 33% in value of its stock market in 21 days, one built on an explosion of margin debt. Two, its ever weakening status in foreign trade. In June 2015, exports just about made it beyond the red line after three months of contraction. Imports on the other hand saw a decline for the eighth-straight month. The world has forever been built on the notion that this factory of the world will keep on rolling out products to be packed and shipped and consumed on foreign soil. But some things aren’t looking right. When there are a few cracks to be seen, you know, the structure – however gargantuan – is losing its youth.

There is every reason to believe the Chinese stock market is a perfectly acceptable indicator of its citizens’ expectations from the country’s exports. [As per Bank of America-Merrill Lynch estimates, foreign investors own less than 1% of Chinese mainland stocks.] The crash wasn’t surprising. Never ever since the mid-2009s have Chinese export numbers looked so vulnerable. We are today sitting on half-a-year of Chinese missteps.

China has forever continued to blame sluggish foreign demand for its slowing exports since Lehman was sent calling on the undertaker. But there are problems bigger than presuppositions that come in the names of PIIGGS and everything so “First World”! Alright, exports aren’t growing because there is trouble in China’s buyer markets and the fact that the Renminbi has appreciated in the 10%-plus range the past year. But if buyer market troubles and currency appreciation are problems, why are even its imports a nightmare? Eight straight months of decline is no jest. Factory overproduction in China has forced imports on a downhill ride. The trouble with China is that while government officials have started complaining of the nation’s apparently grim future in global trade, exporters are complaining about everything becoming more expensive. A handful of observations do prove our fears about ‘glorious China forever’ in foreign trade.

One, China’s wages aren’t the same as they were 25 years back. Since 2003 (except in 2008), wages in China have risen at a CAGR of 18% or more (as per a McKinsey study). Vietnam and Indonesia today are cheaper destinations for export-manufacturers. One recent example being Microsoft moving two of its mobile handset-making plants to Hanoi (Vietnam). [If you recall, it was the sudden sustained rise in factory wages that signaled the end of boom times for Japan and Korea.]

Two, cuts in interest rates and greater incentives to the manufacturing community don’t seem to be working to force a rebound in China. At least that’s not been the case in recent years, and now, almost every economist has started talking of an under 7% GDP growth for China, for the first time since 2009!

Three, China is increasingly becoming a tougher place to do business and foreign companies are feeling singled out; after years of consideration, the Chinese bourses are still not a welcome place for foreign companies who are still kept out of the most lucrative of investment areas.

Four, the Chinese are not consuming enough and this is one big reason for an oversupply in their domestic market at present – showrooms to stadiums to real estate. Efforts to give a prop to the real estate sector like lowering of downpayments on domestic property purchases and reduction in ownership period during which sellers are liable to a capital gains tax on their second homes, haven’t worked.

Five, who will trust China’s numbers when the Chinese don’t. I’ve heard on the grapevine that the recent negative expansion in export volumes is primarily because the near 50% y-o-y growth in the lone month of February had to be balanced out. But just imagine – China is the only trillion dollar-plus (GDP) nation capable of reporting export growth figures such as the following in six months [of H1, 2015] at a go: -3.31%, +48.33%, -14.99%, -6.44%, -2.40% and +2.80%. There’s another interesting aspect to the near 50% exports growth recorded in February 2015 came during a time when most factories, businesses, exporters’ offices were shut (after Chinese New Year; meaning minimal business for a fortnight). China makes an economist feel more like...Alice in Wonderland.

Six, China’s growth was brought about by both cheap farm labour moving to cities and the two generations of post war baby boomers. While on one hand, prosperity in the past three decades has drained surplus farm labour pool in China, on the other, the great Chinese labour market is growing less productive and older by the day. China is presently nearing the Lewis Turning Point (a time when most underemployed farmers have joined work in the cities). The median age in China at present is 36 years as compared to India’s 25. Blame the one-child family policy that began in the late 1970s.

Seven, while on one hand lies the problem of lowered domestic consumption, the Chinese consumer is gaining popularity by the day for his romance with foreign-made (luxury) goods, tourism, global education, etc. As per a McKinsey research, the Chinese will account for about 20% of global luxury sales in 2015. Economist Intelligence Unit claims that for 82% of Chinese travellers, shopping is a crucial part of their travel plans. In UK, a Chinese tourist spends 200% more than the market average on shopping. “Chinese tourists have no problem buying Prada by day but sleeping in two-star hotels by night,” claims EIU. The main reason why the Chinese middle-and-upper-middle class are buying more products from overseas is price (prices in China are 30-50% higher because of hefty import tariffs and consumption taxes; compare the price of a Louis Vuitton handbag in Beijing and Paris) and guarantee of authenticity. Is China mutating into the USA of tomorrow?

Eight, the Chinese government has taken steps to limit the growth of the shadow banking system in the country that for years has grown unchecked leading to close to $7 trillion of public sector investments being wasted (Deloitte 2015 report). While this crackdown will on one hand reduce new NPAs, it will on the other, have a negative fallout on exports growth, with less easy capital being accessible to Chinese export-manufacturing clusters. And here’s something that connects us to where we started. If the shadow banking system is to be included, the ratio of China’s debt to GDP touches 200% - 40 percentage points higher than Greece’s in the beginning of July 2015!

Nine, English. If you are an importer and want some quick profits by selling Made in China, you will have to speak to a Chinese supplier. Do that and you understand how China isn’t China because of its young salesforce’s language skills or certified education – it’s because they’ve mastered the art of assembly lines and are ingenuously capitalising on the human capacity of a headcount of 1.4 billion, 50% of whom were employed on farms until 15 years back. Today however, the Chinese youth are increasingly receiving foreign education. With global education, blue-collared wages will become white-collared salaries and Made in China will no longer be easily affordable. Export volumes will take a hit, given that emerging economies are where China sends 58% of its produce (UN Comtrade; CY2014).

Ten, admittance. Confessions have started pouring in from policymakers in China. Actions like slashing of interest rates thrice in the past nine months and reduction of reserve cash twice in the past seven months to pump liquidity into the economy, had become indications loud enough. Now, leading voices in China have started proclaiming that a “slower, sustainable growth” is key to attaining an “investment-driven” expansion model. Recall what Zhou Xiaochoan, Governor of the People’s Bank of China, said at WEF this year: “The Chinese economy slowing down to an extent to make the economy more sustainable would be good news.” Imagine the head of China’s central bank making a statement as such ten years back!

Having documented facts proving the possible fall in China’s exports in times to come, let me add that China will remain the world’s largest exporter and a powerhouse for at least a few more years to come. And those praying that China’s fall will mean India’s rise are in for some correction too. A $7 trillion economy growing at 5% is equivalent to a $1.5-2 trillion economy growing at anywhere in excess of 15%. So India in terms of absolute value (GDP) creation isn’t closing in on the gap anytime soon. Also, in terms of exports in dollar terms, China’s numbers are over 7 times that of India’s. So even a 2% increase in China’s exports y-o-y will mean a widening lead, if India were to continue growing its exports at anything under 14% in real terms. FDI inflow into China is still strong, with the country having overtaken USA as the leading FDI investment destination in the world last year. We won’t write off the Chinese dream yet.

But there are signs that a decade down the line, the lines appearing on the foreheads of its policymakers, manufacturers and exporters may grow more prominent. China’s loss isn’t India’s gain. There are others waiting to grab the space that China can’t fill in years to come for various reasons. But yes, India has a significant opportunity in this space. And that will be realised, if ten years hence, articles about India’s Export Temples flourishing and ‘Made in India’ are written instead of just ‘Make in India’.

A Chinese proverb goes thus: “If you are planning for a year, sow rice; if you are planning for a decade, plant trees; if you are planning for a lifetime, educate people.” For India, it’s time to move beyond just rice and trees.