<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR>March 7, 2009
COMMENTARY
</TR><!-- headline one : start --><TR>China's 2009 rebound? It's pure fantasy
</TR><!-- headline one : end --><!-- Author --><TR><TD class="padlrt8 georgia11 darkgrey bold" colSpan=2>By William Pesek Jr
</TD></TR><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->THE idea that China can grow strongly as the world unravels is a fantasy. Ditto for the view that China is going to save the global economy.
China is already slowing, of course. The third-biggest economy grew 6.8 per cent in the last quarter of 2008. Such growth sounds like heaven just about everywhere else. Yet for an economy at China's level of development, one that zoomed along at a 13 per cent pace in 2007, it's hell.
Premier Wen Jiabao was wrong to err on the side of caution on Thursday when he delivered the Chinese equivalent of the US State of the Union address. He said the country's 8 per cent growth target is within reach, indicating an additional stimulus package isn't needed. It is a bad call, and he is likely to regret it as 2009 unfolds.
Markets are sensing as much. On Wednesday, stocks the world over soared on hopes that at least one major economy would skirt disaster. Markets came back to Earth on Thursday after China quelled stimulus speculation. As the global meltdown deepens, it probably means the export demand that drives China won't return until well into 2010.
Here are five reasons a Chinese rebound in 2009 may not pan out:
World growth is collapsing.
This is not hyperbole, but a sobering fact. The International Monetary Fund cannot downgrade its global growth estimates fast enough as the credit crisis overwhelms economies as diverse as Ireland, Japan, the United Arab Emirates and the United States.
The trillions of dollars of wealth being lost as markets plummet are depleting public coffers and damaging consumer psychology. It is not a good environment for any hopes of reviving global demand.
China's key customer is in hiding, indefinitely.
Just when you thought conditions in the US$14 trillion (S$21.7 trillion) US economy could not get any worse, they 'deteriorated further' in almost all corners over the last two months, the Federal Reserve said in its regional business survey this week.
Mr Wang Hanmin, a sales manager at Yixing Bochangyuan Garments in Jiangsu province, spoke for many this week when he said exporters are facing a 'life and death' crisis. Exporters are so worried they are calling on the government to weaken the yuan after the biggest slump in overseas sales in more than a decade.
One thing is for sure: The US consumer is not about to help China out of this dilemma.
A lack of tools.
It's important to remember that the 4 trillion yuan (S$909 billion) spending plan unveiled in November was more spin than reality. Much of it was but a tally of existing spending efforts. They were never going to boost a US$3.3 trillion economy anyway.
China's almost US$2 trillion of currency reserves would seem to give the nation considerable policy latitude. Yet China's vast economy lacks the financial infrastructure to get the bang it needs from its stimulus in yuan. Would building more roads, bridges and dams do the trick? 'Eight per cent GDP doesn't really tell you anything about job creation,' says Mr Stephen Green, head of research for China at Standard Chartered. 'Many of these projects are not particularly job-intensive.' The spending will help, but such projects did not propel growth as hoped over the last 30 years. Exports did.
All those US Treasuries.
Financing loads of new projects could prove dicey, even for cash-rich China. Any move to draw down US$696 billion of US government debt could leave China with big losses and prolong the US recession.
Of course, there's the 'official' gross domestic product figure, and then there's the real situation in the most populous nation. The double-digit drops in exports among China's biggest trading partners in Asia show how bad things are getting.
Rebalancing takes time.
Just as the US needs to become a nation of savers, China needs more consumers. That's a destabilising, decade-long process requiring the creation of national safety nets and more education and health-care spending. Making that sort of transition today will prove extraordinarily difficult.
Mr Wen was not exaggerating on Thursday when he said China faces its 'most difficult' year of the past 30. How much China's export collapse is hurting can be seen in the 20 million migrant workers who are suddenly unemployed. The risk of social unrest is higher than at any time since 1989, the year of the Tiananmen Square protests.
The Premier says China needs to 'reverse the economic slide as soon as possible'. Too bad officials in Beijing think their work is largely done. It's not, no matter what the official spin is. BLOOMBERG
COMMENTARY
</TR><!-- headline one : start --><TR>China's 2009 rebound? It's pure fantasy
</TR><!-- headline one : end --><!-- Author --><TR><TD class="padlrt8 georgia11 darkgrey bold" colSpan=2>By William Pesek Jr
</TD></TR><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->THE idea that China can grow strongly as the world unravels is a fantasy. Ditto for the view that China is going to save the global economy.
China is already slowing, of course. The third-biggest economy grew 6.8 per cent in the last quarter of 2008. Such growth sounds like heaven just about everywhere else. Yet for an economy at China's level of development, one that zoomed along at a 13 per cent pace in 2007, it's hell.
Premier Wen Jiabao was wrong to err on the side of caution on Thursday when he delivered the Chinese equivalent of the US State of the Union address. He said the country's 8 per cent growth target is within reach, indicating an additional stimulus package isn't needed. It is a bad call, and he is likely to regret it as 2009 unfolds.
Markets are sensing as much. On Wednesday, stocks the world over soared on hopes that at least one major economy would skirt disaster. Markets came back to Earth on Thursday after China quelled stimulus speculation. As the global meltdown deepens, it probably means the export demand that drives China won't return until well into 2010.
Here are five reasons a Chinese rebound in 2009 may not pan out:
World growth is collapsing.
This is not hyperbole, but a sobering fact. The International Monetary Fund cannot downgrade its global growth estimates fast enough as the credit crisis overwhelms economies as diverse as Ireland, Japan, the United Arab Emirates and the United States.
The trillions of dollars of wealth being lost as markets plummet are depleting public coffers and damaging consumer psychology. It is not a good environment for any hopes of reviving global demand.
China's key customer is in hiding, indefinitely.
Just when you thought conditions in the US$14 trillion (S$21.7 trillion) US economy could not get any worse, they 'deteriorated further' in almost all corners over the last two months, the Federal Reserve said in its regional business survey this week.
Mr Wang Hanmin, a sales manager at Yixing Bochangyuan Garments in Jiangsu province, spoke for many this week when he said exporters are facing a 'life and death' crisis. Exporters are so worried they are calling on the government to weaken the yuan after the biggest slump in overseas sales in more than a decade.
One thing is for sure: The US consumer is not about to help China out of this dilemma.
A lack of tools.
It's important to remember that the 4 trillion yuan (S$909 billion) spending plan unveiled in November was more spin than reality. Much of it was but a tally of existing spending efforts. They were never going to boost a US$3.3 trillion economy anyway.
China's almost US$2 trillion of currency reserves would seem to give the nation considerable policy latitude. Yet China's vast economy lacks the financial infrastructure to get the bang it needs from its stimulus in yuan. Would building more roads, bridges and dams do the trick? 'Eight per cent GDP doesn't really tell you anything about job creation,' says Mr Stephen Green, head of research for China at Standard Chartered. 'Many of these projects are not particularly job-intensive.' The spending will help, but such projects did not propel growth as hoped over the last 30 years. Exports did.
All those US Treasuries.
Financing loads of new projects could prove dicey, even for cash-rich China. Any move to draw down US$696 billion of US government debt could leave China with big losses and prolong the US recession.
Of course, there's the 'official' gross domestic product figure, and then there's the real situation in the most populous nation. The double-digit drops in exports among China's biggest trading partners in Asia show how bad things are getting.
Rebalancing takes time.
Just as the US needs to become a nation of savers, China needs more consumers. That's a destabilising, decade-long process requiring the creation of national safety nets and more education and health-care spending. Making that sort of transition today will prove extraordinarily difficult.
Mr Wen was not exaggerating on Thursday when he said China faces its 'most difficult' year of the past 30. How much China's export collapse is hurting can be seen in the 20 million migrant workers who are suddenly unemployed. The risk of social unrest is higher than at any time since 1989, the year of the Tiananmen Square protests.
The Premier says China needs to 'reverse the economic slide as soon as possible'. Too bad officials in Beijing think their work is largely done. It's not, no matter what the official spin is. BLOOMBERG
