CHINESE ECONOMY MONITOR---NOTE NO.6

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 theother countries of the South and the South-East Asian region. If the Chinese economy is badly affected, they too are likely to feel thenegative consequences of the down-turn in the Chinese economy. Keeping this in view, we have been bringing out a periodic "ChineseEconomy Monitor" based on open information. This is the sixth in the series)

ASSESSMENT

China's manufacturing sector, which accounts for 43 per cent of its economy, continues to contract, but at a slower pace sinceDecember,2008, after reaching the lowest level in November,2008. While the Chinese authorities have noted with some satisfaction theslowing down of the contraction rate, unless the process of contraction is stopped and reversed, the economic situation marked byincreasing unemployment and decreasing commodity prices due to a fall in demand will continue to deteriorate. How soon the contractionwill stop and expansion will start again will depend on how soon the US and the European Union countries are able to set right theireconomies on which the Chinese manufacturing industries are dependent. In the estimate of the Chinese experts, a change for the better inthe situation is unlikely before the last quarter of this year.The Chinese authorities have been cautioning the people to be prepared for asevere foreign trade situation and a grave unemployment situation this year. There are two major areas of concern to the authorities.Firstly,the number of migrant workers from the rural areas in Central and Western China who have lost their jobs in the previously flourishingcoastal areas and gone back to their home towns and villages, which was earlier estimated at 10 million, has doubled since January,2009.Secondly, one million graduates, who passed out of the universities and other institutes of higher education in 2008, are still without jobs.They are expected to be joined by another 6.11 million graduates by the middle of this year. There is not much scope for finding them jobs inthe urban areas. The authorities are trying to persuade them to go back to the rural areas and work in farms or in the new infrastructureconstruction projects under the stimulus plans announced in November last or start their own small businesses with loans to be given bythe banks. These 7.11 million educated unemployed will be competing for jobs with the 20 million who have lost their jobs in the coastalareas. Apart from investments in the development of rural infrastructure and in projects which will benefit the people, the Government hasalso undertaken sector-wise plans for restructuring and modernising 10 pillar industries on which the manufacturing sector depends.Through various measures to reduce the hardships for the unemployed people and their families and through constant interactions withprovincial leaders and officials and the people, the Government has till now avoided any social unrest due to the increase in unemploymentand fall in earnings due to the decrease in commodity prices. It is to be seen whether it will continue to be able to do so till the economystarts looking up again. The Government has estimated that to prevent a further deterioration, a GDP growth rate of at least eight per cent isa must this year. Its policies and plans are meant to achieve this rate.

MANUFACTURING SECTOR CONTINUES TO CONTRACT, BUT AT A SLOWER RATE

China's manufacturing contracted for a fifth month in December,2008.The CLSA China Purchasing Managers' Index stood at a seasonallyadjusted 41.2, compared with a record low of 40.9 in November, CLSA Asia-Pacific Markets said in an emailed statement. A reading below50 reflects a contraction.Manufacturers in industries from metals to toys are reducing production or closing down. The Aluminum Corp ofChina Ltd, the nation's biggest maker of the metal, and the Yunnan Tin Co, the world's largest producer of tin, cut output as prices fell. "Chinese manufacturing was very weak in December," said Eric Fishwick, head of economic research at CLSA in Singapore. "With fiveback-to-back PMIs signaling contraction, the manufacturing sector, which accounts for 43 per cent of the Chinese economy, is close totechnical recession."The output index fell to a record low of 38.6 in December,2008, from 39.2 in November, while the measure of neworders rose to 37 from 36.1. The index of export orders jumped to 33.6 from 28.2, CLSA said. "Chinese manufacturers reduced the size oftheir work forces at the fastest rate recorded by the series to date," the report said. An employment index tracked by CLSA has contractedfor five consecutive months to 45.2 in December.China's economic growth may have slipped to 5.5 per cent last quarter, the weakest pacein at least 15 years, according to Shanghai-based Industrial Bank Co.A drastic slowdown in industrial-output growth is mainly due tocompanies running down excess inventory, central bank Vice-Governor Yi Gang said on Dec 26, 2008. That process may continue until theend of the second quarter, Yi said.Exports fell for the first time in seven years in November, 2008, imports plunged and industrial outputgrew at the slowest pace in almost a decade. The CLSA index, started in 2004, is based on a survey of more than 400 manufacturingcompanies and tracks changes in output, orders, employment, inventories and prices.
---- Agency reports, January 3,2009. CLSA stands for Credit Lyonnais Securities Asia. According to a Dow Jones report of March 2,2009,the CLSA China Purchasing Managers Index rose to 45.1 in February from 42.2 in January.Since falling to a record low of 40.9 in November,the CLSA PMI has risen for three consecutive months, but remains below 50.0, indicating a continued manufacturing contraction. A PMIreading above 50.0 indicates expansion. "Manufacturing activity is still contracting, only at a more moderate pace than at the end of 2008,"said CLSA Head of Economic Research Eric Fishwick. He added: "Despite the bounce in credit data in January the impact on domesticmanufacturing orders so far seems modest: most of the improvement in the PMI new orders index reflects export orders."

URBAN UNEMPLOYMENT RATE WORSENS

2.The Ministry of Human Resources and Social Security (MOHRSS) said on January 19,2009, that China's urban unemployment rate was 4.2per cent at the end of 2008, up 0.2 percentage points year-on-year.As of December 31, 2008, there were 8.86 million urban residentsregistered as jobless, up 560,000 from the end of the third quarter, according to the Ministry spokesman Yin Chengji.Yin said that 11.13million urban jobs were created last year, 11 per cent above the Government target. The slight rise in the jobless rate reflected a slowingeconomy amid the global financial crisis, said Tang Min, Deputy Secretary of the China Development Research Foundation. "The figure looksall right, but the real situation could be much more serious, as migrant workers and newly graduated college students were not included inthe government count," he added. Yuan Gangming of the Center for China in the World Economy of the Tsinghua University described therate as a "sudden rise." He said the 2008 figure was a reversal of the recent years' declines. The urban jobless rate fell for five consecutiveyears, from a high of 4.3 per cent in 2003 to 4 per cent in 2007."The 4.2 per cent rate was already a sharp increase, given that widespreadjob cuts only surfaced in the second half of last year.The unemployment situation was grimmer than shown by the latest figure," he said,noting that migrant workers were not included in the count.Statistics from the MOHRSS showed that 10 million, or about 10 per cent of atotal of 130 million migrant workers, had returned to their rural homes jobless as of December. Starting in the second half of 2008,weakening foreign demand has hit companies in the coastal industrial belts where most migrant workers had been employed. TheGovernment will focus on jobs for college graduates, migrant rural workers and urban residents this year, said Yin.China aims to keep itsregistered jobless rate below 4.6 per cent and provide 9 million new urban jobs during 2009. Yuan estimated that the urban unemploymentfigure could worsen in the first half of this year.
----Xinhua, January 20,2009

20 MILLION JOBLESS IN RURAL CHINA

3.According to Chen Xiwen, who is in charge of rural planning, about 20 million rural migrants were now out of work -- more than thenumber announced in December,2008.This is an indication that the slowdown in the Chinese economy was intensifying. An average of sixto seven million people leave their rural homes every year to find jobs, on top of the 20 million jobless."According to these calculations,there will be fairly big pressure on employment for around 25 million rural residents," Chen said. The year 2009 could be the "toughest year"since the turn of the century for the development of the countryside, which has fallen behind as Chinese economic reforms have favouredthe cities.
--- AFP, February 2,2009

CONCERNS OVER RURAL SITUATION

4.A report issued jointly by the State Council and the Central Committee of the Communist Party of China on Februrary 1,2009, said:"Thedevelopment of agriculture and rural areas in 2009 is of special significance.The biggest potential for boosting domestic demand lies in ruralareas; the foundation for securing steady and relative fast economic growth is based upon agriculture; the toughest work of securing andimproving people's livelihoods stays with farmers." Vice-Premier Hui Liangyu said the same day during an inspection visit to the Anhuiprovince: "Facilitating farmers' employment is an acute and important task in present rural (endeavors).We must strengthen job training forrural labor, hire as many rural migrant workers as possible in construction work and new public-interest posts and proactively support ruralmigrant workers who have returned home to start businesses." The joint report urged central and local government departments to adoptmeasures to create jobs and increase rural incomes. Companies were asked to take on more social responsibilities by giving rural migrantworkers favorable employment treatment.Flexible employment policies and more training opportunities were suggested by the report.Meanwhile, local government departments should increase their investment to provide favorable tax and fee policies to those who lost jobsin cities and expect to find new work in their hometowns, the report said. Agriculture remains the weakest link in the Chinese economy,which has seen a widening gap between cities and the countryside. The document, the sixth of its kind to address rural problems, alsourged authorities to take resolute measures to avoid declining grain production and to ensure the steady expansion of agriculture and ruralstability.
-----Xinhua of February 2,2009

HONG KONG: BIGGEST EXPORTS DECLINE SINCE MARCH,1958

5.Hong Kong's exports by volume in December, 2008. declined by 12.8 per cent as compared to the figures for December,2007. They haddeclined by 7.1 per cent in November,2008, as compared to the figures for November,2007.Excluding Germany, exports to all of Hong Kong'smajor markets dropped, according to the Census and Statistics Department. The latest figures showed that exports to the United Statesdropped by 19.6 per cent by volume in December, 2008, while exports to the mainland slumped by 10.5 per cent. Exports to Japan and theUnited Kingdom fell by 10.2 and 12.5 per cent, respectively. Exports to Germany rose slightly by 1.9 per cent.
----- "Business Weekly of Shanghai Star" of February 17,2009

6.Hong Kong's exports declined by 21.8 per cent in January,2009, as compared to the figures for January,2008. They had declined by 11.4per cent in December,2008, as compared to the figures for December,2007. The Hong Kong Government announced on February 26,2009,that the territory is headed for its first full-year economic contraction since the Asian financial crisis of 1997-98.The export decline was thebiggest since March 1958. Imports fell by 27.1 per cent in January, 2009, as compared to the figures for January,2008. The trade surplusduring January,2009, amounted to US $930 million. John Tsang, the Financial Secretary of the Hong Kong Government, stated on February26,2009, that the city's economy will probably shrink by 2 to 3 per cent in 2009, after a 2.5 per cent expansion in 2008.The GrossDomestic Product contracted by 2.5 per cent in the fourth quarter of 2008 as compared to the fourth quarter of 2007.
---- Reuters as reported in the "China Daily " of February 27,2009.

STIMULUS PLANS FOR TEN PILLAR INDUSTRIES

7.In a series of meetings held at Beijing from January 14 to February 25,2009, the State Council reviewed and approved, in principle, adjustment and stimulus plans for 10 major industries----- namely, automobile, iron and steel, textiles, equipment manufacturing,shipbuilding, electronics and information technology, petrochemicals, light industries, nonferrous metals and logistics. "The selection of these ten key industries was based on two points: the first one is the importance of the industries. These industries have atremendous impact on economic development since all of them are important pillar industries in the Chinese economy, main contributors tothe value of industry output and government revenue, key channels for employment, and are the main industries driving GDP growth. Thesecond point is that these industries have clear problems. Over the past several years, these industries have all demonstrated problemsincluding excessively rapid expansion of production capacity, oversupply, low-level and redundant construction, irrational product mixes,low-end products with heavy energy consumption and serious pollution. Due to a high reliance on exports, they have all been greatlyaffected by the global financial crisis," said David Daokui Li, Director of the Center for China in the World Economy (CCWE) at theTsinghuaUniversity, in an interview with the "People's Daily". The plan for the steel industry, for example, requires that high-energy-consuming andhigh-polluting production facilities are eliminated, and that projects that simply expand production capacity are not to be approved. Theplan for the electronics and information technology industry approves six projects and encourages private capital to enter this sector. Thisis done in the hope of realizing major breakthroughs in scientific and technological projects. Industry integration in textiles, iron and steel,equipment manufacturing and automobile enterprises was also encouraged in the stimulus plans. Some analysts say the plans' primarytargets are still to overcome current hardships. The policies of lowering the automobile purchase tax, "automobiles to the countryside,""home appliances to the countryside" and encouraging boat owners to exchange old boats for new ones underscore the new plans toexpand domestic demand. The policies supporting the establishment of export bases, increasing export credits and reducing export taxrebates, strengthen the idea of stabilizing China's share of the international market. In addition, the policies provide direct support to textileenterprises by raising the export tax rebate by 1 percentage point to encourage exports and secure 20 million jobs in the textiles industry.Efforts to maintain employment rates and boost people's livelihoods are noticeable. Li said: "The idea behind the industry plan policies has acertain degree of continuity from the past. They cannot be viewed simply as short-term economic policies hastily enacted to prevent theeconomy from sliding. The global financial crisis has prompted the Chinese Government to accelerate the introduction of industry stimulusplans, but their purpose and significance go beyond just meeting urgent needs." He further analyzed that the Chinese economy has alwaysbeen large but not strong for four main reasons. First, China's industries are short of core technology, occupy the low ranks of the industrychain, and have low added value. Second, high-energy consumption causes high pollution, which leads to serious energy waste. Third,serious low-level, redundant construction and surplus production make industries heavily dependent on the international market. Fourth,industry clustering remains low and the industry chain is incomplete."From the stimulus plans, we can see the government's highexpectation of industry upgrading and structure optimizing. This can be achieved through phasing out backward productivity, encouragingtechnical innovation, and merging and integration between enterprises. These efforts can help expand the Chinese economy in size andstrength."
----People's Daily Online of February 27,2009

SEVERE FOREIGN TRADE SITUATION FEARED

8.Speaking at a forum held on the sidelines of the 19th East China Fair at Shanghai on March 8,2009,Chinese Vice Minister for CommerceZhong Shan said that China would face a "severe" situation in foreign trade this year against the backdrop of the spreading global financialcrisis. "The financial crisis has not bottomed out yet, which may reduce the country's international trade markedly.In addition, tradeprotectionism of some countries might escalate. Therefore, China's foreign trade in 2009 will face a severe situation," he said. China's foreign trade topped 2.56 trillion U.S. dollars in value in 2008, but the year-on-year growth rate dropped below 20 per cent for thefirst time in seven years, according to the General Administration of Customs. The total value was up 17.8 per cent compared with 2007, butthe growth rate was down 5.7 percentage points. The trade surplus stood at 295.47 billion U.S. dollars, up 12.5 per cent, according to theadministration.
----Xinhua

FALLING COMMODITY PRICES

9.China's consumer price index (CPI), a main gauge of inflation, fell by 1.6 per cent in February 2009, the National Bureau of Statistics (NBS) announced on March 10,2009.This was the first monthly fall since December 2002, when prices decreased by 0.4 per cent. The producer price index (PPI), which measures inflation at the wholesale level, fell for the third straight month, dropping by 4.5 per centyear-on-year in February, 2009.The NBS said that the February figure did not represent a deflation problem in China, since money supply wasample because of the proactive fiscal policy and the relatively easy monetary policy. "We do face price downward pressure, but that cannotbe translated into a deflation problem," said Zhang Xiaoji, researcher with the Development Research Center of the State Council, agovernment think tank. Su Ning, Vice- Governor of the People's Bank of China (PBOC, the central bank), said on March 10,2009, that deflationwould not occur given the banks' ample liquidity. The NBS said falling international commodity prices, caused by the global economicdownturn, contributed to the domestic price fall. It added that the CPI in the first two months of 2009 dropped by 0.3 per cent from the sameperiod of 2008.The price declines "reflect how severely the economy was affected by the global financial crisis in the second half of lastyear," said Zuo Xiaolei, chief economist with Galaxy Securities. It would not be surprising if prices fell further in the next few months, asboth domestic and overseas demand had fallen since late last year, said Wang Xiaoguang, economist with the National Development andReform Commission. Also, he noted, there was a "commodity price bubble" early last year that persisted until mid-year. China spent yearsstriving to contain inflation and runaway economic growth. But as the global slump began to affect the world's third-largest economy, theGovernment shifted focus to fighting deflation and maintaining growth. Yi Gang, PBOC Vice- Governor, told Xinhua that the central bank hadsufficient tools to fight deflation. He noted the country had not confronted a typical deflationary period, which was characterized bycontracting loans and money supply, a recession and falling prices. To prevent deflation, real loan growth this year was expected to exceed5 trillion yuan (735.3 billion U.S. dollars), Su said while discussing the new price figures. China's money supply rose by 17.8 per cent and18.8 per cent in December, 2008, and January 2009, respectively. New loans hit a record of 1.6 trillion yuan in January, double theyear-earlier figure, and are expected to have grown further in February. Su told Xinhua that China still had plenty of room to maneuverusing monetary policy in the face of the global financial crisis. He said the benchmark deposit and loan interest rates had been reduced fivetimes since September and room for further adjustment was "smaller but still exists." There's also "much room for cutting banks' reserverequirement ratios," which had been reduced four times since September. Zhuang Jian, senior economist with the Asian DevelopmentBank's China resident mission, said declining prices could hurt corporate profit margins and reduce their desire to expand production.Thedeclines are "an indicator of falling confidence amid the economic slowdown," said Ai Hongde, president of the Dongbei University ofFinance and Economics. "The falling prices indicate some industries have excess production, while consumers are unwilling to spend atwill," he said. He suggested the Government should do more to boost personal spending, which should function along with the massiveinvestment plans. Deflationary pressure could ease in the second half of the year if consumption was boosted, he said.Falling pricesprovided an opportunity for the Government to further ease controls on commodity prices, especially those of farm produce.
-----Xinhua report of March 10,2009.

EDUCATED UNEMPLOYMENT WORRISOME

10.During a media briefing at Beijing on March 10,2009, on the sidelines of the current session of the National People's Congress (NPC), theHuman Resources and Social Security Minister Yin Weimin warned of a "grave" unemployment situation in China, but claimed that the Government's measures to boost employment have started showing "initial effect". The number of new workers stood at 690,000 and930,000 in January and February, 2009, as compared to 550,000 and 380,000 in November and December of last year. He said that theGovernment attached priority to helping college graduates find jobs this year. He mentioned a series of measures approved by the StateCouncil in February,2009, including encouraging college graduates to work in the rural areas, at grassroots urban communities, and insmaller enterprises, asking research institutions to recruit university graduates, and stepping up support for graduates starting up their ownbusinesses.He said that the State Council has scrapped residence restrictions in cities, except in the four municipalities of Beijing,Shanghai, Tianjin and Chongqing, to offer graduates broader access for jobs.About 6.11 million college students are due to graduate thisyear, and another one million who graduated last year are still looking for jobs.
------Xinhua of March 10,2009

FOURTH CONSECUTIVE MONTHLY FALL OF EXPORTS

11.The Chinese General Administration of Customs announced on March 11,2009, that China's exports decreased by 25.7 per cent inFebruary, 2009, as compared to the figures for February,2008. This was the fourth straight monthly fall as global demand shrank, it said.The exports contracted to US $64.90 billion in February.The imports decreased by 24.1 per cent as compared to the figures forFebruary,2008, to US $ 60.54 billion. The combined foreign trade declined by 24.9 per cent to US $ 125.44 billion as compared to the figuresfor February,2008. The trade surplus dropped to US $4.84 billion, less than one-seventh of the figure for January, 2009.
---- Xinhua News Agency release of March 11,2009.

STEEL EXPORTS DECLINE STEEPLY

12.China's steel exports reached 1.56 million tons in February, 2009, down 62 per cent as compared to the figures for February,2008. Therewas an 18 per cent decrease as compared to the figures for January,2009. It was the lowest figure of steel exports in the last 52 months. Atthe same time, China imported steel amnounting to 1.09 million tonnes in February,2009, a drop of 14.7 per cent as compared to the figuresfor February,2008.
---"China Securities Journal" as reported in "China Daily " of March 11,2009.

( The writer is Additinal 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 )