CHINESE ECONOMY MONITOR----NOTE NO.4

B.RAMAN

(What will be the impact of the global financial and economic melt-down on the Chinese economy? This question should be of interest to the other countries of the South and the South-East Asian region. If the Chinese economy is badly affected, they too are likely to feel the negative consequences of the down-turn in the Chinese economy. Keeping this in view, we have been bringing out a periodic "Chinese Economy Monitor" based on open information. This is the fourth in the series---B. Raman)

TWO-YEAR STIMULUS PACKAGE ANNOUNCED
2.China announced on November 9,2008, an economic stimulus programme amounting to US $586 billion to be spent over a period of two years. It described its aims as to bolster domestic demand and help avert a global recession. According to analysts, these figures seemed to include expected expenditute on already on-going projects for which money had already been set aside in the past as well as newly-planned expenditure on new projects to be launched in the coming two years. The announced sum represents about 16% of China's economic output last year, and is roughly equal to the total of all central and local government spending in 2006. New spending of even half that amount would be a substantial addition to the amounts already budgeted for during the current financial year. Most of the allocated amount is proposed to be spent on new housing, new infrastructure, agriculture, health care and social welfare. It also includes a tax deduction for capital spending by companies. China's stimulus package is substantially higher than that of the US ( US $ 168 billion), Japan (US $ 51.5 billion largely in the form of payouts to families and tax reliefs to business companies) and Germany (US $ 29.9 billion mainly tax reliefs and loans). The German package has a four-year duration as against two years in the case of China. The time period in the case of the US and Japan is not known. The Chinese contention is that the best way they could contribute to re-stabilising the global economy is by a substantial increase in expenditure in those sectors such as housing and infrastructure, which would create new jobs at home and, at the same time, maintain a high level of imports of raw materials and other items such as minerals and metals required for this purpose.

While the outlook for China's once-booming economy has rapidly worsened, the country remains comparatively well-placed to deal with a slowdown. The boom years have been well used by China to clean up its banking system, return state enterprises to profitability and shore up government finances. Now the state is putting its significant financial resources -- including a budget that for the moment is still in surplus -- into play to shore up the economy. China's financial system remains largely unscathed by the global credit squeeze, but prospects for the country's continued rapid growth have quickly deteriorated. Export orders from the U.S., Europe and Japan are weakening, causing factories around China to trim work forces or shut down entirely -- leading to unemployment that could undermine popular backing for the Government.Urban consumers are pulling back from China's housing market, causing new construction to collapse to its worst level in a decade. With construction weak, support for other key industries such as cement and steel has declined, and they are cutting output and canceling orders for raw materials -- moves that are being felt by commodities firms around the world. The downward spiral in confidence is likely to depress growth even further. China's leaders "realize this is really about sentiment and confidence, which needs a very fast and strong policy response," said Wang Qing, an economist with Morgan Stanley.Based on recent trends and without a policy response, China could have seen only a GDP growth rate of 5% to 6% next year, according to Mr. Wang. With the stimulus measures that include previous moves to cut interest rates and end caps on bank lending, he said China now has a good chance of achieving a growth rate of 8% to 9% in 2009.

Economists said China's new stimulus plan represents an even more dramatic policy response than China adopted in 1998 during the Asian financial crisis, when Beijing spent heavily to counter a similarly worrisome combination of an external financial crisis and a sharp domestic slowdown."As the global economic and financial crisis has become more severe in the last two months, China must take flexible and prudent macroeconomic policies to resist the negative impact of the international situation and deal with these complicated and ever-changing trends," the State Council said in its statement announcing the package. Another question is how quickly the effects of the stimulus package will be felt in the real economy. While the Government's statement urged local officials to rapidly put new money to work, some lag is unavoidable. And since infrastructure spending has already been growing by about 20% annually for the past couple of decades, there may be physical and logistical limitations to how much spending can be further accelerated.

The Government is presenting the program as an opportunity to do many things that would be worth doing anyway. These include helping companies upgrade to higher-tech equipment, improving irrigation in rural areas, raising pensions and social-security payments, and improving water and waste treatment in cities.

----- Extracted from an article by Andrew Batson in the "Wall Street Journal" of November 10,2008.

PEOPLE'S BANK'S CAUTION

3.In its monetary policy report for the third quarter of the year ending on September 30,2008, the People's Bank of China, the country's central bank, said as follows: "Inflationary pressures had eased alongside falling commodity prices. The Bank will focus on preventing deflation in the short term. It will use open market operations to help increase liquidity and will ensure that adequate credit is available in the financial system to complement the Government's fiscal stimulus policies. Uncertainties in the domestic economy are increasing. The risk of an economic downturn is getting bigger. China's macro-economic controls are facing a more complicated and fast changing situation. Problems in the property sector could spread to other parts of the economy. Monetary policy should prevent deflation in the short term, but prevent inflation in the long run. The current stimulative policies should not sow the seeds of inflation down the road."

----- a Reuters despatch as carried by the "Wall Street Journal" of November 18,2008.

GRIM UNEMPLOYMENT SITUATION

4.Describing the jobs situation as grim, Human Resources and Social Security Minister Yin Weimin told reporters on November 19,2008, that it could worsen from the impact of the unfolding global financial crisis. With company bankruptcies and a slowdown in production creating stresses in labour relations, he said, dealing with labour strife was now his Ministry's top concern. Shortly after unveiling the economic stimulus plan, China is now turning its attention to managing the more intractable social fallout from the downturn ---- growing discontent fuelled by rising unemployment. New measures aimed at easing labour disputes and job losses launched in recent days, coupled with calls from top security officials for the appropriate handling of protests, all point to the fact that maintaining social stability has become one of Beijing's most pressing tasks at hand. The policies range from setting up a fast-track system to nip labour disputes in the bud, providing financial aid to firms to help them retain workers, improving job search services for rural workers and clearing a backlog of sensitive court cases. 'The root cause of unhappiness is unemployment. Without a job it is hard to survive in China because of weak social protection,' said Professor Hu Xingdou, an expert in economics and China issues with the Beijing Institute of Technology. He added: "If leaders want to defuse tensions, they must solve the job problem."

Social Security Vice-Minister Zhang Xiaojian revealed on November 19,2008, that demand for workers in 84 cities across China in the third quarter of this year had fallen by 5.5 per cent - the first third-quarter drop in "many years".China's official urban unemployment rate was currently about 4 per cent, but could hit 4.5 per cent by the year-end. Next year, the rate could climb even higher, Zhang said.Yin identified October as the month when "employment in China began to show the impact of changes in the international economic situation".Up to then, he said, the "employment situation was basically stable". Looking at next year, he said the first quarter would be "more difficult" but expected a turnaround in the second quarter when the effects of the massive stimulus package would become evident.

Even before the current crisis, China's 24 million urban job-seekers outnumbered new jobs two to one. With even fewer jobs next year, the fierce competition among the country's university graduates, for instance, is set to intensify. The number of graduates will rise to 6.1 million next year, up from 5.59 million this year, said Zhang. Rising unemployment among China's 230 million rural labourers - about half of whom toil far from their hometowns - is also a major problem. The authorities are concerned that they could be the biggest source of unrest.

China's official jobless rate does not take into account these unregistered, highly mobile migrant workers. It would be much higher if they were included. Unemployment was most severe in China's southern manufacturing and export hub where thousands of labour-intensive firms which employ migrant labour have collapsed due to weakening external demand, said Yin. Already, there have been isolated protests by workers over unpaid wages at shuttered factories. But of increasing concern for the Chinese Communist Party is the widening scale of unrest and scope of issues that are fuelling public dissatisfaction. In recent weeks, taxi drivers upset over falling incomes have staged strikes in at least three Chinese cities, including Chongqing. Earlier last week, a two-day protest over home demolitions in Gansu province left more than 70 injured.
Yin denied that there were currently any "large-scale retrenchments" or mass movement of jobless migrant workers back to their hometowns, but admitted that the "situation was still developing".
----- Source:- The Straits Times of November 23,2008

5.Yin acknowledged that labor unrest was the Ministry's “top concern,” following recent protests from workers who have lost their jobs and are demanding back wages. According to him, the Government would try to curb labor unrest by solving half of disputes at the grassroots level. A fast-track system to deal with labor disputes will be put in place as well. Yin reiterated that the Government would help enterprises through the crisis to reduce unemployment. He pledged that his Ministry will ensure that employees receive wages due to them in situations where factory closures are inevitable. Industries will also be required to uphold their legal obligations. He added: “The global economic crisis is picking up speed and spreading from developed to developing countries and the effects are becoming more and more pronounced here. Our economy is facing a serious challenge.” \
---- Source Reuters of November 20,2008

6.China announced measures on November 20,2008, aimed at absorbing job losses and staving off civil unrest, amid rising concerns the economic crisis was fuelling long-simmering social tensions across the country.The policies cover a wide range of areas, such as raising compensation for farmers kicked off their land, helping laid-off workers, ensuring police handle protests correctly and clearing a backlog of sensitive court cases."The campaign will help to ease social conflicts, protect the people's legal interests and maintain social stability," Zhou Yongkang, China's top law enforcer, said in detailing the eight-month programme to clear the court cases.China's Communist Party has long been obsessed with social stability, concerned that any type of protest could escalate into a major challenge to its 59-year rule. With China's economy slowing, a series of high-profile protests have erupted recently over job losses and long-standing grievances over the many injustices in Chinese society such as powerful interests taking people's land. Public Security Minister Meng Jianzhu warned police chiefs they "should be aware of the challenge brought by the global financial crisis and try their best to maintain social stability", the official "China Daily" reported. Highlighting the concerns, thousands of people took to the streets this week in northwest China's Gansu province wielding axes, chains and other weapons to confront authorities over a typical "land grab" dispute.Meanwhile, tensions remain high in southern Guangdong province, China's manufacturing heartland, where thousands of manufacturing workers have gathered in recent weeks outside closed-down factories to demand unpaid wages.Social Security Minister Yin Weimin admitted that an expected spike in unemployment was a serious concern for the Government."We have called on all levels of the Human Resources and Social Security Ministry to place priority on the stabilisation of the employment situation as the top task that we must tackle," Yin told reporters.He announced a series of measures to try to stave off unemployment and to help those who have lost their jobs, particularly among the 230 million rural migrant workers who form the backbone of China's struggling export industry.Yin said measures included helping migrants find a job when they come to urban areas and providing extra training for those returning home. The Ministry of Land and Resources, meanwhile, announced it would increase compensation for farmers' land from 2009 "to guarantee the lawful rights of farmers whose land has been taken", in a statement on its website on November 20.Government-backed "land grabs" are a common occurrence in China and have sometimes fuelled violent protests as owners of the properties are forcibly moved away to make way for new developments.These issues were the backdrop to this week's two-day riot in Longnan, Gansu province, which left many people injured.The "land grab" issue was also being addressed as part of the campaign to clear the sensitive court cases announced by Zhou via the official Xinhua news agency.Six types of court cases were listed as priorities to be fast-tracked, including those linked to land disputes, others delayed due to local government interference and ones involving migrant worker payments, Xinhua reported.
---- Source: A despatch of the Agence France Presse (AFP), dated November 20,2008.

IMPACT OF SLOW-DOWN ON ENERGY IMPORTS

7. During October,2008, the import of crude oil increased by 28 per cent as compared to imports during October,2007, kerosene imports increased by 24 per cent and gasoline imports by 5 per cent. As against this, diesel imports declined by 46 per cent, LPG imports declined by 25 per cent, and fuel oil imports declined by 13 per cent. China's petroleum data often show big, unexplained short-term swings. Analysts, therefore, caution against making any assessment on the basis of figures for just one month. Diesel stockpiles appear to have steeply risen before the Olympics. Part of the steep drop in imports of diesel in October could have been the result of the excessive pre-Olympics build-up of stocks. China never publishes data on stocks held in respect of any of the items. However, analysts estimate that diesel stocks in the first nine months of 2008 were more than twice in the same period of 2007. The increase in the import of crude oil during October could indicate that the oil companies are taking advantage of the fall in crude prices to build up their stocks. The Government may also be doing so to build up its strategic reserves. Jiang Jiemin, the head of the China National Petroleum Corporation, has said in a statement put on its web site: " Demand for fuel has fallen sharply since September, pushing up stockpiles of unsold gasoline and diesel. As the global financial crisis and its impact on China's economy deepen, the company's business has also been significantly affected."
---From a report by David Winning and Shai Oster in the "Wall Street Journal" of November 18,2008.

TEXTILE EXPORTS: GROWTH SLOW-DOWN

8.Statistics from the Chinese Customs indicated that during the first nine months of this year, China's textiles and clothing exports touched $136.94 billion, a rise of 8.1% over the same period of 2007. But the growth rate is 11.9 percentage points lower than that of the corresponding period of last year.
------ Source, TV News Channels of November 20,2008.

TOURISTS ARRIVALS DOWN

9.The latest statistics issued by the China National Tourism Administration (CNTA) indicate that in September 2008, there were 1,883,300 international tourists to China, down by 15.10% compared to the same period of last year. This September, China achieved a total of US$ 3.142 billion in tourism foreign exchange earnings, a decrease of 11.36% year-on-year. From January to September this year, the number of international arrivals visiting China went down by 3.53% to 18,352,700; and China's total tourism foreign exchange earnings was US$29.828 billion, a decrease of 3.26% from the same period of last year. According to the analysis of CNTA, due to the series of serious natural disasters and "unexpected incidents" that took place in China this year, the Chinese tourism industry has been affected to a certain degree. Also, the global financial crisis has had an adverse impact on tourism
---- "China Hospitality News" of October 24,2008

ASSESSMENT

My Comments: The Chinese banks and other financial institutions have not been facing any problems till now. The economy has started doing badly as compared to the past double digit growth rates due to a continuing decline in exports, which has particularly affected small and medium scale enterprises. However, it has been doing better than the economies of other countries. The decline in exports in an exports-dependent manufacturing sector has been leading to job losses, which are particularly affecting migrant labour from the rural areas, who had found jobs in the coastal areas. This has already started causing sporadic instances of social unrest. The introduction of economic reforms in China since 1978 was not accompanied by the introduction of appropriate labour reforms to ensure for the workers fair wages, timely payment of wages, protection against arbitrary dismissals and retrenchment and expeditious disposal of labour disputes in a manner that is viewed as fair by the workers. This could aggravate the social tensions at a time of economic decline. The Government has embarked on a two-pronged policy---- a fiscal stimulus package to dramatically step up expenditure on new infrastructure and other projects to create new jobs and modernisation of labour reforms and their strict enforcement. The Government's assessment is that the present decline will continue till June 30 next and even worsen. It is hoping that by then the benefits of the stimulus package will start flowing in and that the new US President Barrack Obama would have succeeded in reversing the melt-down in the US. If (it is a big IF) that happens, things could start looking up again from July. The Government is also embarking on a policy of restructuring the manufacturing sector in order to expand the domestic demand and decrease the present over-dependence on exports. If the Government makes its labour laws more labour friendly than foreign investor-friendly as they are now, China could to some extent lose its attraction to foreign investors as compared to India, which is viewed by many foreign investors as over-friendly to labour. However, the superior state of Chinese infrastructure, which is now sought to be improved even further, will continue to give an advantage to China as compared to India with the woeful state of its infrastructure. (23-11-08)

( The writer is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. He is also associated with the Chennai Centre For China Studies. E-mail: seventyone2@gmail.com )