31 Aug 2009
Chinese Economy: Weathering the Storm
The second quarter of 2009 brought a strong rebound on world financial markets, giving hope to Asian exporters and encouraging them to prepare for a recovery in demand for their products. In fact, signs are emerging that these exporters are already placing their bets. Rising purchases of semi-finished products by Mainland manufacturers is believed to be behind the recent pick up in Mainland imports. The year-on-year decline in imports narrowed from an average of 28.1% in the first five months of this year, to an average of only 14.1% in June and July.
This performance is echoed in Hong Kong's export numbers. The year-on-year decline in Hong Kong exports to the Mainland (which comprised a significant share of semi-finished products) narrowed markedly from 23.5% in the first quarter of this year, to just 5.4% in the second quarter. Thus, the supply chain is back in action, and we can look forward to a rising trend in overseas exports in the coming months.
This uplift is likely due to the arrival of the long-anticipated replenishment of global inventories. But demand is still not strong across the board; consumers are being picky. Sales of consumer durables have been hit hard during this recession, while demand for daily-use items have held up remarkably well. Between September 2008 and June 2009, the value of retail electronics products sold in the US fell by 7% year-on-year; meanwhile, grocery sales bucked the trend and rose by 1.5%.
China's exporters are in the best position to put products on the shelves at a price that the chastened American consumer is willing to pay. Thus, the US shopper's new-found taste for thrift should channel more orders in China's direction.
But is this a sure bet? There are lingering doubts on whether demand is sustainable once inventory replenishment runs its course. Much of the recent improvement in the US economy can be traced to President Obama's stimulus measures. The underlying fundamentals remain shaky. Unemployment may still reach double digits by the end of this year, despite the surprise improvement in July. And even if employment holds up, wages are growing at a markedly slower pace. The continued weakness in the housing market is another concern. 22% of all US homes, representing more than 20 million residences, were in “negative equity” in the first quarter. Mirroring the US consumer's new-found taste for thrift, the US personal savings rate increased to 5.2% in the second quarter. Rather than taking on debt for new purchases, US households are paying back debt and deferring purchases. Hence, there is little reason to be optimistic about consumer behaviour once the effect of the stimulus package wanes.
The Need to sustain Domestic Demand
The Sino-US Strategic and Economic Dialogue, held in July this year, concluded that China could generate more stable and balanced economic growth by reducing reliance on exports and stimulating domestic demand. This is precisely the strategy that China has pursued in the wake of the financial crisis, and the country has succeeded very well at sustaining domestic demand throughout this period.
The RMB 4 trillion yuan economic stimulus package announced in November last year focused primarily on infrastructure and construction projects. Related industrial output, such as cement and large and medium sized tractor, has registered double-digit growth since the announcement. Government measures have also supported the motor vehicle industry. Following the introduction of an incentive of up to RMB 5,000 per household to boost car ownership in rural areas, motor vehicle production rose by 12% in the first five months of this year.
However, what has really distinguished China from other economies is consumer demand. This has remained resilient. Retail sales rose by 15% in the first six months of this year. Medical products, toys, furniture and garments are among the sectors that registered double digit growth in domestic sales. This has been critical in compensating for the collapse in demand from overseas.