Bank of China: Financial Slowdown to Have Huge China Impact

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Effects of financial storm only beginning to be felt and it will get worse

Nov. 3 – The world’s biggest economies are very likely to post negative growth in 2009 said Zhu Min, the executive vice president of the Bank of China.

Speaking at a conference of Chinese bankers in Shanghai on Saturday, Zhu said that current economic conditions would have a “huge” impact on China. “The financial crisis will technically precede economic and political turmoil by eight to twelve months,” he said.

His comments led to a depressing round of recent statistics and similar comments from respected Chinese academics. China’s Purchasing Managers Index, which is based on a survey of over 700 companies in 20 industries published by the China Federation of Logistics and Purchasing, fell in October to 44.6, down from 51.2 in September. A figure below 50 represents a contraction. Meanwhile, the pace of growth in China fell for the fifth consecutive quarter, and is currently at its slowest rate since 2003, during the days of SARS.

The problems have come at a bad time for Beijing’s attempts to reform part of its economy. Companies have not taken up options on permanent staff due to a tightening of labor laws earlier in the year, which has left many unemployed. Additionally, measures designed to curb in the worst practices of low end manufacturing have taken their toll, with South China especially hard hit in terms of companies closing or relocating to other Asian destinations, and especially to nearby Vietnam. Unemployment is rising in Guangdong, and many migrant workers also heading back home to take advantage of the new land reforms which give them the ability to lease land now provided to them by the government.

It remains to be seen how many will return to service China’s southern manufacturing heartland. In the meantime, factories are increasingly lying dormant or only just ticking over with low scale production. There have been increasing calls for Beijing to reverse some of its policies concerning labor law in the wake of the downturn, while initial feedback from Beijing rejects this in favor of fiscal policies to spur a sagging economy back to life. The central bank has cut interest rates three times in seven weeks, and has pledged to increase infrastructure spending to boost the economy. It has also increased export tax rebates and cut taxes on property transactions, little of which to date have generated much impetus.

The slowdown in China is not likely to be spread evenly across the country however. South China will be especially hard hit, while progressively north, manufacturing tends to take on more industrial capabilities and these industries are likely to sustained, although low end manufacturers and trading companies around Shanghai and the Yangtze River Delta could also face problems. Beijing is likely to remain relatively immune, while other key cities have enough of their own inter-domestic trade running that they remain essentially immune from international trade patterns. The unique feature then of the China slowdown is that export-biased industries will be affected, while domestically reliant businesses will almost certainly thrive.