International Law

I Don?t Much Care for the ?China Benefits From Global Recession? Theory

By Stan

I’ve seen this argument a lot recently, and while I certainly agree that China has a great deal of upside and is in much better shape than some other countries, some of these writers seem to be smoking a lot of happy leaf.

Case in point, a post on Seeking Alpha, a stocks blog:

Now, all the major economic forces ? America, Japan, and Europe ? are suffering recessions. Only China is the last remaining safe haven.

Let’s start here. The last remaining safe haven is U.S. t-bills, not China. If anyone invests in China simply because it is in better shape at the moment than Japan, that’s a real stupid reason for investing, and I question your judgment.

The financial markets in China are sound and solid. They have an average of less than 2.5% bad debt in total loan. Moreover, in the last year, domestic savings increased 26% to 4.8 trillion, while debt remained only at 2.9 trillion. Comparatively, savings increased from 46% of total GDP in 2007 to 52% of total GDP in 2008. These are huge numbers.

My response: you can crunch a lot of numbers, but the solidity of China’s stock market rests on a lot of other issues concerning the public sector, corporate governance, accounting standards — need I go on? Let’s just say that there are a lot of remaining uncertainties with listed companies, and that I wouldn’t call China’s financial markets “sound and solid” just because the country’s savings rate is high.

The decrease in exports will necessitate Chinese firms to focus more on domestic consumers. As more firms try to maximize domestic consumption, this process will drive down the price of domestic products and increase the Chinese consumers’ buying options. Instead of producing cheap products for developed countries, Chinese consumers will enjoy the low price themselves. Hence, the global recession is giving China an opportunity to rebalance its economic structure and relocate resources more efficiently.

I applaud the focus on the upside here. Well done. However, other analysts think that this rebalancing effort will be difficult and will necessitate a great deal of short-term pain. Will it be good in the long term? Absolutely, if we can all get there in one piece. But I wouldn’t exactly call the huge drop-off in exports a wonderful opportunity.

And as the global economy slips deeper, the demand for resources will drop significantly and drive down the cost of most products. In addition, the large layoff in developed countries will let China keep its talented workers and hire more skilled foreign workers.

Yes, inflation is low and the poor labor market globally will drive down wages. But let’s please be realistic here. No one here is hiring foreign workers at the moment. In fact, most firms are looking to further localize, firing foreigners and replacing them with Chinese management. I don’t see this changing for at least a year or two.

The author goes on to implore readers to purchase stock in Chinese companies, particularly those in which he already owns shares. I should be used to this sort of cheerleading by the financial commentariat, but it does get annoying during a recession.

Yes, China is doing better than some other countries. Government policy seems to be OK as well, particularly the stimulus measures already announced. However, you have to be nuts to ignore the challenges that lie ahead in the next few years, including not only economic hurdles, but also the related political and environmental issues that need to be dealt with.

© Stan for China Hearsay, 2009. | Permalink | 2 comments | Add to del.icio.us

Full post as published by China Hearsay on April 02, 2009 (boomark / email).