Clearer skies are one of the unexpected benefits from the economic crisis. The brown haze that typically obscures much of Hong Kong suddenly lifted with the slowdown of manufacturing activity. Unfortunately, the air quality will probably get better before it gets worse. Chinese officials are putting on a brave face, by saying that some economic indicators show a rebound, but a closer look at the numbers shows that the situation is deteriorating. Therefore, we may be in for some good beach weather on the South China Sea.
Shenzhen and Dongguan, two of the major manufacturing hubs along the Pearl River Delta, are being devastated. Factories are furloughing workers, announcing extended holidays for the lunar New Year and even shutting down. An estimated 20% of the regional factories could be out of business by year end, thus affecting millions of laborers. Many factories and warehouses are being transformed into alternative uses, such as low budget hotels and dormitories, in an attempt to generate revenues. Electricity demand is plunging, and the energy shortages that were once a staple of daily life, are becoming distant memories. The State Electricity Regulatory Commission reported that power consumption fell 8.93% y/y in December. This helped explain the sharp improvement in air quality, since the electricity generators did not have to resort to auxiliary thermal units to meet excess demand. Wages are also coming down, as displaced factory workers desperately look for sources of income. Recent pictures of shivering applicants, queuing up for positions that pay less than 1,000 Rmb per month, said it all. Many people are decamping for the interior, producing a negative multiplier on the local economy. The government of Guangdong estimated that 600,000 migrant workers left at the end of last year. Restaurants are cutting prices in an effort to attract clientele, feeding deflationary pressures. This is going to fuel new global imbalances, as China becomes a source of global deflation. The hopes and aspirations of Macau to tap into the rich vein of Chinese tourists looking for places to spend their disposable income went down the drain, with most the casinos cutting up to half of their staff. These are the reasons why the unemployment rate is on the rise, and social unrest is spreading.
Beijing is running against the clock, hurriedly trying to counter the downturn by opening the fiscal taps, reducing interest rates and weakening the currency. However, this will not be enough to compensate for the collapse in external demand. Exports represent 40% of GDP, and Chinese domestic demand is not sufficiently robust to make up for the collapse in trade. A look at the numbers says it all. On an aggregate level, the year-end trade data was disheartening. Exports dropped 2.8% y/y in December, while imports fell 21.3%. But, a closer look at the reports from the major shipping facilities was bone chilling. Cargo volume at Hong Kong’s Air Cargo Terminals (HACTL) plunged 29.7% y/y in December. Other shipping facilities along the Pearl River Delta reported similar declines. Therefore, the expectation that China would avert the mayhem from the global downturn was pure denial.
The Chinese government’s attempts to revive domestic demand are not having much of an impact. The automobile industry is an interesting telltale. Chinese automobiles are mainly for domestic consumption, given the huge unmet demand. However, car sales rose only 7.3% y/y during 2008, marking the worst performance in over a decade. The biggest slowdown occurred during the latter half of the year, as the effects of the global credit crunch took hold. Although the numbers were bad, officials might have been shading the truth. The Ford Motor Company recently announced that annual sales at its Chinese joint venture dropped 5.9% y/y in 2008. Therefore, the crisis is deepening. This has dire implications for commodity prices and the rest of the emerging markets. There was a lot of hope that China would take up the slack that was being generated by the U.S. and Europe. However, the size of the Chinese economy is only $4.1 trillion, less than a tenth of the combined U.S. and European economies. Moreover, it looks like China is going into its own economic downturn. Therefore, there is not much it will contribute to global demand. This suggests that we may see clearer skies ahead over much of the Chinese mainland, but the improvement in environmental conditions will mainly be due to a contraction in global economic activity.