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.

5 Comments so far ↓

  1. Feb

    When migrant workers can not find jobs in cities, they just stay home taking care of their small farms and playing Majiang,bide their time till the situation turns around. Some will protest if their bosses don’t pay them, but I guess that will be sporadic. Chinese people are diffrent from westners. Basically,we are tolerant and peaceloving, we can put up with it unless we think we are treated with injustice. And one more thing we should bear in mind is that we have gone through too much misery,suffering, commotion and tumult. So we not only think the present situation is not a big deal but also have no interest in riots as some experts expect.

    [Reply to comment]

  2. Feb

    Hi Xu,

    Yeah, I agree I don’t see the big riots coming right now. As you say, the Chinese are patient, and anyway, if things get ugly with layoffs, the government has enough financial resouces to ensure due wages are paid. Some people point at the university graduates that can’t find a job, but I really can’t see them start a revolution right now, most are essentially peaceful citizens.

    And in spite of all this, there is something unsustainable in the situation. The investments of the stimulus plan will take the place of the FDIs, and for a while things will go on normally. But the stimulus plan and reimbursement of due wages are only patches, they can’t go on forever. Who will take over when the stimulus plan is finished? The market of the peasants? Frankly speaking, I don’t think they are ready after being left out for so long.

    So even if the present situation is still not a big deal (I agree) it can lead into a situation that will be a big deal. Mismanaged economy can be more cruel and unjust than deliberate injustice - the great leap forward is a good example. And bear in mind that one thing is to put up with suffering when the whole country is suffering together, a very different thing is to bear with suffering while you watch your neighbours driving BMWs.

    [Reply to comment]

  3. Feb

    So what we should do is praying for the comeback of America and crying as loud as we can to ask the gov to pour money into countryside and the pockets of low-income people in cities. The rural area has been neglected for too long.

    Pres Obama will take care of the first thing and Pres Hu and Premier Wen the second. I hope they can succeed.

    [Reply to comment]

  4. Feb
    Roberto Lupi

    Here in Europe, the situation is a complex patchwork. Some countries are doing better than others.

    The hardest hit are obviously the ones with more advanced and developed financial industries (for example, U.K., Iceland) and those who had a recent housing (Ireland, Spain, Portugal) or economic boom (Spain, Iceland and many countries in Eastern Europe).

    Most of the early disorders were in Eastern Europe. Many of those countries came out shattered from the demise of the soviet empire, people there know first hand what happens when the whole economy comes to an halt.

    Western and continental countries have more a developed welfare state. The crisis is starting just now to change from a newspapers’ topic to a real world experience. State aid is being poured into many companies to freeze or reduce layoffs. Most countries have subsidies programs for the unemployed that will be cushion the first phase of the crisis.

    The issue - in my opinion - is for how long this scheme is viable and what will be the impact on our national debts.

    [Reply to comment]

  5. Feb

    Hi Roberto, thanks for the comment.

    Perhaps my observations are influenced by the fact that the European country I visited most recently was Spain, which is one of the hardest hit countries.

    In any case, whatever the statistics might say, today the Crisis is much more visible in Spain than it is in Eastern China. Unemployment is soaring and people are genuinely worried about the future. I still haven’t felt this fear in the people here. And I have talked Crisis with a lot of Chinese of all social strata.

    [Reply to comment]

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