3 Reasons why we might be sitting on a 鞭炮Written by Uln on February 6th, 2009
More bad news about the Crisis. Yesterday All Roads had another of those worrying posts: 3 Announcements and 2 Rumours, and not one of them good.
Still, on our return from the double New Year’s season, many of us are suprised to see the sky is not falling on our heads, and the dire predictions we did before the holidays have not quite turned true. Indeed, the Crisis in China seems to have a very annoying quality for bloggers: it is not happening. Yes, we’ve had bad news coming every week for the last months, we’ve seen experts we respect telling us how bad the unemployment is, how many factories are closing. And all of them are right, if we look at the numbers. Yet, on the street, no Crisis to be seen.
What is going on here? Who is taking our Crisis away, depriving the dismal scientists of their fair share of joy and fulfilment? And more importantly: is it not time to deem the whole affair a bluff, and go join the ranks of the optimistic, together with the guys at the World Bank and the CPC?
Where are all the Crises Gone, long time passing?
You might remember that post I wrote where I started out wondering about the different perceptions of the Crisis in China and in the West. 3 months have passed and this contrast is, if anything, sharper than before, as I have seen during my New Year’s travels. Right now Europe is bleeding, there is no question about this. China, on the other hand, looks to the casual observer like a normal, almost healthy economy. One cannot sense the Crisis.
In Shanghai, Zhejiang, Fujian, three of the engines of China’s economy, I have seen nothing going on but normal everyday life. The shops are full of people, “we hire” signs are on the windows, and taxi drivers remain for the most part optimistic - at least those who didn’t buy shares. One of them even told me: “Riots only happen in Guangdong, in Shanghai we are civilized”
Back to the office, in my work with industrial investors in China I see the same picture: while some Western clients have cancelled or postponed their 2009 FDI projects, not a single project has been stopped by our Chinese clients, which are all large SOEs.
The time’s for the Ox and don’t give me no Bull
Here are 3 reasons that might explain this strange gap between theory and observation: delay, transparency and inertia.
- Delayed effect: The crisis comes to China in a very different way than to the West. In our case it was a bursting financial bubble, hitting us all with the speed of sound. In China, it is different. They didn’t have the “complex financial instruments”, their financial system was relatively isolated. In China the Crisis is caused by exports and FDI, which is a far less explosive mix. Look at FDIs, for example: a typical project cycle to build a factory is 3 years, and there’s a point of no return somewhere in year 2, when the construction is mobilised and the equipment paid for. This introduces a long delay while the ongoing projects finish and until the absence of new projects cause panic in subcontractors. Same effect with the production of factories which had a large backlog in 08.
- Inertia: China is a massive system that has been moving at high speeds for 30 years. This doesn’t stop in one day. It is not only the phisical momentum of the thousands of ongoing projects, it is also psycological inertia. in the minds of many Chinese the system is strong, and there is no reason to believe in a Crisis that has never happened in their working lifetime. Behaviours do not reflect fear, and many go about their New Year’s shopping like any other year. Worse still, some seem happy to believe that it is America’s fault and this is an American Crisis; and mind you, not all agree that smart China need lend the old brother a hand.
- Transparency: This is the most important reason of the three, and the one that scares me most. For all the good things that one can say of CPC’s economic policy (yes, they did draw 300million out of poverty) there is one serious fault that nobody fails to notice: Lack of Transparency. With the largest part of the economy dominated by SOEs or following direct orders from the party, it is not unreasonable to think that there might be a bigger soup on the fire than we are led to believe.
I don’t want to cause alarm or instigate hoarding behaviours like that of our old professor, but this is not looking good. If there’s one single best way of making a Crisis more deadly, that is withholding information and letting it burst only when it is too late.
The two pillars of China’s growth in the 2000s were SOEs and FDIs. The FDI leg is seriously failing now, and the effects will be felt progressively. Even with all the financial might of the Chinese State, it is hard to imagine the SOEs taking the place left by the FDIs, let alone going out to take over the World. I cannot see the Chinese companies leading the effort, I can’t see their necessary creativity and initiative to open new markets to replace the lost export ones. All I can see is a bunch of Giant SOE’s which are better at leveraging their massive size and influence than at impressing us with their products.
There is something quite anomalous in this perceived calm of today, and this blogger thinks that he can smell a Rat. But the time is not for Rats anymore, it is for Ox.
Which is one 2 bits short of a Bull.