Monday, October 20, 2008
Global Recession and China
Global Recession and China
Decoupling , the theory that Chinese economy is independent and is not dependant upon USA and EU market has been tested severely under the after math of the recent financial crisis in Global markets, especially financial and stock exchange markets. This shows that the world economy is truly global in scope practical implications. The impact of global crisis is explored in the context of financial, manufacturing and stock exchange of China.
"Decoupling holds that European and Asian economies, especially emerging ones, have broadened and deepened to the point that they no longer depend on the United States for growth, leaving them insulated from a severe slowdown there, even a fully fledged recession. Faith in the concept has generated strong outperformance for stocks outside the United States - until now." Reference International Herald Tribune
Financial investments abroad and Chinese losses
In China the impact of international financial crisis has been varied and it has not been open and clear due to lack of transparency and information gathering in China. In financial field China Investment Corp., the sovereign wealth fund that bought stakes in Morgan Stanley and Blackstone Group LP before their stocks plunged, may have as much as $5.4 billion frozen in a U.S. money-market account. Stable Investment Corp., an affiliate of Beijing-based CIC, was the largest shareholder in Reserve Primary Fund on Sept. 1, according to regulatory filings. Reserve Primary suspended withdrawals after becoming the first U.S. money- market fund in 14 years to leave investors with losses. Stable Investment had about $6 billion in additional U.S. money-market funds earlier this year. China, which has primarily held its $1.8 trillion in currency reserves in low-yielding U.S. government debt, set up CIC last year to put about $200 billion into assets with higher rates of return, such as stocks and corporate bonds. It invested $5 billion in Morgan Stanley, the second-biggest U.S. investment bank, and $3 billion in buyout firm Blackstone, manager of the largest leveraged buyout fund. Both New York-based companies have lost more than 70 percent of their market value since the purchases.
CIC devoted most of its money to domestic banks, and has about $35 billion remaining for global investments, according to McCormack at Z-Ben, which consults on China's money- management industry. The fund had placed $11 billion in U.S. money-market funds, according to filings with the U.S. Securities and Exchange Commission. It may be using the money funds to park cash until selecting outside money managers to help it invest, said Brad Setser, a fellow for geo-economics at the Council on Foreign Relations, a New York-based think tank.``. It has taken them awhile to figure out what they want to invest in,'' Setser said. This shows the cautious policy adopted in aftermath of the financial crisis by Chinese authorities
Depending on its performance, CIC may be allocated as much as $1 trillion of China's foreign exchange reserves, according to Michael Martin, an Asian trade and finance analyst at the U.S. Congressional Research Service in Washington.
A Sept. 29 2008, SEC filing shows that Stable Investment held 11.1 percent of Reserve Primary's institutional shares at the beginning of the month. Based on the 48.9 billion institutional shares outstanding as of May 31, the most recent information available, Stable Investment's stake would have totaled about $5.4 billion.
Stable Investment has also invested roughly $5.9 billion in three other U.S. money market funds, according to documents filed earlier this year with the SEC. That includes $2.1 billion in the Invesco Aim Liquid Assets Portfolio; $2.3 billion in the JPMorgan Prime Money Market Fund; and $1.5 billion in Deutsche Asset Management's DWS Money Market Trust.
By Sept. 16 2008, the day after Lehman had filed for bankruptcy protection, investors had sought to withdraw $40 billion from the $62.5 billion Reserve Primary fund. Reserve Primary ended up releasing $10 billion at a rate of $1 a share. The last value published for the fund was 97 cents a share. Reserve Primary's loss triggered a widespread run in which investors withdrew $133 billion from U.S. money-market funds the following two days.
Reserve Primary is liquidating its assets and expects to make an initial distribution of $20 billion to remaining investors .The situation became clearer when China Investment Corp. (CIC), operator of the country's sovereign wealth fund, on 15 October 2008 said it had given notice to the Reserve Primary Fund, a U.S. money market fund, to withdraw all its investment before the latter's suspension announcement.
Bloomberg reported on 13 October 2008 ,that CIC may have as much as US$5.4 billion frozen as the Reserve Primary Fund suspended withdrawals last month. The Reserve Primary Fund suspended redemption last month because of losses on debt issued by bankrupted Lehman Brothers.A U.S. regulatory filing showed Stable Investment Corp. was the biggest institutional shareholder in the U.S. monetary market fund with a stake of potentially more than US$5 billion.
CIC confirmed its investment in the Primary Fund, but said it would not be subject to the possible 3 percent losses incurred by the Reserve Primary Fund. The fund announced investors who hadn't made a withdrawal before the redemption suspension may be subject to the 3 percent principal losses.
The Sovereign wealth fund, with capital of US$200 billion from the country's huge foreign exchange reserve, has attracted great attention at home as its two major investments in Blackstone and Morgan Stanley suffered losses during the ongoing financial crisis.
China Investment Corp., the government's sovereign wealth fund, may raise its stake in U.S. investment group Blackstone LP after the two agreed to boost the Chinese company's ownership limit.CIC had paid $3 billion for a stake in Blackstone's June 2007 initial public offering, but has seen the value of that investment sink in the bear market, to the consternation of many in China.
According to a regulatory filing, a revised agreement reached on 16 October 2008, between Blackstone and CIC unit Beijing Wonderful Investments Ltd. has raised the limit on the Chinese company's stake to 12.5 percent from 9.99 percent. The filing with the U.S. Securities and Exchange Commission, posted on Blackstone's Web site, did not require regulatory approval.
There was no official comment from CIC on its plans for additional share purchases. At the time of Blackstone's IPO, its shares were valued at $31 apiece. On Thursday, they rose 1.7 percent to $9.36.The $200 billion investment arm of the Chinese government was set up to make profitable use of Beijing's foreign reserves, which totaled $1.9 trillion by the end of September 2008.
CIC's biggest investment to date was a $5 billion investment in Morgan Stanley, one of nine major banks now seeking relief from the deepening credit crisis through the U.S. government's $700 billion banking bailout. That purchase will give it a 9.9 percent stake in the investment bank.
The Chinese sovereign wealth fund also invested more than $100 million in Visa Inc.'s $19.1 billion IPO and has invested in a fund managed by J.C. Flowers, a U.S. private equity firm.
Stock , Commodities Market and Economic Crisis :
Shanghai Stock Exchange is the bench mark fro Main Land China and it has also been victim of the crisis in a drastic way. SSE has lost over 60 % of its value than its peak value a year ago and the slide has been steady and it has not been able to correct its balance after the global crisis. The SSE closed on 1833.26 points on 17 October 2008. This is at its historical lowest points.
China’s securities watchdog has warned listed state-owned enterprises against trading speculatively in the futures market as it acts to contain risks amid volatility in the global commodity markets. The SOEs can only use futures contracts as a hedging tool and must strictly control risks, China Securities Regulatory Commission, said in a Website statement . "China is highly reliant on imports of raw materials, but their prices are determined by overseas futures prices." However, the United States subprime crisis triggered volatility in futures prices and companies faced higher risks. So hedging in overseas futures market plays an important role in helping companies keep risks at bay and also helps them control costs while they aim to be profitable."The risks are manageable as long as we adhere to the principle of hedging," CSRC noted. Crude oil, copper, palm oil and rubber fell yesterday on concerns that sales will plummet.
The Chinese banking regulator on 16 October 2008 urged financial institutions to step up their supervision in face of world economic turmoil. The China Banking Regulatory Commission is requiring institutions in the banking industry to tighten up its credit management and avoid embezzlement of funds to the stock market. Control over property-related credit should be strengthened to encourage normal consumption, strike down on speculative activities and support the rational development of the real estate industry, said the commission. It also urged commercial banks to make better preparations for possible losses, asking them to increase provisions.
Manufacturing Sector … Economic Crisis and Relocation
The majority of China’s exports are destined to USA and EU market so the present crisis has played a dominant role in affecting the manufacturing base of the Chinese export dependant industries.
The toy market especially and new export orders have been affected at a broad spectrum of companies in China. Many big companies dealing in Christmas toys like Santa Claus' outsourcing operation is being affected by deepening US economic woes--US orders for Christmas products made by Chinese manufacturers have dropped off a cliff.
Roosevelt Gift Manufacturing Company in Xiamen, Fujian province is one of the three largest craft manufacturers in Xiamen, who mainly produces Christmas products for the America market."Nowadays, the business environment at home and abroad is poor. On the one hand, we have to face pressures from rising costs and Yuan appreciation; on the other hand, many orders have evaporated due to weaker US market demand," company’s representative Yuki said. She also said her company was searching for counter-measures. For instance, since later last year, the company had switched its target market to Europe out of concerns over its US partners' likeliness to breach contracts. But even the European market is unpredictable.
The firm even tried to squeeze costs by simplifying their products. "The US clients were more interested in lower prices, because expensive Christmas gifts may not be popular," Yuki said. She added the company had considered marketing domestically but was frustrated by thinner profit margins and complicated marketing channels.
Roosevelt is not an isolated company in this squeezing environment. Zhejiang province's Yiwu County, one of China's major Christmas product exporting bases, is also facing a colder market.
He Songping, president of Yiwu Zhong Sheng Crafts Company, which makes Christmas trees, told the EO that orders from the US have shrunk over 50%. Furthermore, since steel prices have jumped 30%, despite simplifications to product design his firm's products are still 15% more expensive.
The trend reaches beyond Christmas paraphernalia. Yiwu's export volume with the US registered negative growth for three consecutive months earlier this year. In April, local enterprises began to diversify their markets, and from May, Europe replaced the US to become Yiwu's largest exporting market.
A professional market consultant institute forecast a further decline in the trade against US and the US financial crisis would be bound to jeopardize its real economy. Under such condition, China had better diversify its exporting market like opening up new market in Middle-East, South Asia and Latin America areas.In America, consumers would often queue for shopping during the month-long golden shopping season that ran from Thanksgiving to Christmas Day. The season has traditionally contributed nearly half of total revenues and profits to US retailers. In the US, Christmas is not only a festival but also a huge economic cake.
However, Santa seemed likely to be less generous in year 2008. Owing to the bad economic situation last year, Christmas spending on the average child stood at around 200 dollar in the US. However, many families planned to halve that spending in year 2008 , because nobody wants to face a heap of credit card bills after the holidays. In addition, the unemployment rate in America is climbing and many people are living off of social welfare services."On September 23 2008, the US National Retail Federation forecasted weakness in the US retail business. The federation contributed the reason to the downturn in the real estate market, climbing unemployment and rising food prices.
When interviewed by the Wall Street Journal, Laurence Meyer, vice-chairman of the board at Macroeconomic Advisers, a US-based economic forecasting firm, said that "The worst-case scenario is that the Fed loses its ability to stimulate the economy further as the funds rate moves to zero."
His firm sees the U.S. unemployment rate rising to 7% next year; though he says it could go to 8% or even higher if credit markets don't improve.
Recent example of lost orders and impact of global crisis is showing itself in bankruptcies and on 16 October 2008 a town government in Guangdong Province has paid 24 million Yuan (US$3.51 million) in emergency living allowances to about 6,500 workers after the world's largest toy maker announced two factories of the town were bankrupt. The companies relied heavily on exports to the United States with 70 percent of all toys being sold to that market, the report said. Analysts said the bankruptcies were the result of the ongoing US credit crisis and that it was the first bankruptcy case on the Chinese mainland due to the global financial turmoil.
There was already a spreading of the crisis in Jiangsu, Shanghai, Zhejiang about 50 % toy manufacturers of Small and Medium Size entrepreneur , textile manufacturers and other consumer goods have already gone bankrupt and the ratio is increasing day by day as the crisis deepens more and more . Chinese government is asserting that they collapsed due to lower efficiency in management and higher cost of production. But the appreciating Yuan has also affected the fortunes of these SMEs. The Chinese government has raised rebate of textile exports to 13 % to counter the affects of global crisis, appreciating Yuan and increased costs.
The trend of these closures and bankruptcies is going to be longer and protracted in days to come and government is also planning to develop new policies to tackle this crisis.
Real Estate Crisis.
The development boom in China in real estate developed huge projects and resulted in increase of prices of housing units across the major cities of China. As the economic slow down and increased inflationary pressure has set in. This has prompted the wave of housing price cuts appearing to have swept across major cities in China after the Olympics. Property developers in Shenzhen, Southern Guangdong province, were among the first to slash prices to boost the sluggish local real estate market. The move, however, triggered a domino effect across the country, with developers in Hangzhou, Beijing, Shanghai and other large cities following suit.
Shenzhen
In the first week of October, the daily-average price for houses traded in Shenzhen had tumbled below 10,000 Yuan per square meter, an important psychological barrier used to measure the decline of the market.
Traditionally, the period from September to late-October has been the high season for property markets. However, the annual Shenzhen autumn fair for real estate that opened on September 29 had dismaying results, according to participating developers.
Based on data released by the Shenzhen bureau of land resources and housing management on October 2, that day alone 64 units of new houses, measuring 5,222 square meters in total, were sold for 50.13 million Yuan.The above trading volume averaged out to 9,599 Yuan per square meter--the lowest daily-average price recorded in the City in 18 months.
According to the Bureau's latest market analysis report for the months from January to August, the real estate market had remained sluggish since June.The report said in August, the city recorded an average property price for housing units at 14,448 yuan per sq m, a drop of 16.7% compared to the average price ten months ago.
Hangzhou
Real Estate Developers in Hangzhou were also plagued by lower prices and trading volume. Since early-September 2008 , developer Vanke had taken the lead in offering discounts and others followed suit, with some offering cuts up to some 30%.
For example, by mid-September 2008 , prices for new properties in a township named Qianjiang New City lingered between 12,000 and 13,000 per square meter after discount--some 5,000 Yuan per square meter lower than properties in the surrounding neighborhoods.
Upon learning of the price slash, some eager buyers queued overnight to compete for limited units. Some crashed the developer's sales office to protest "old" home purchases, who had paid higher prices for similar units when the township was first launched. Protesters were holding banners and threatening to withdraw their purchases.
Some developers who had practiced double standards in offering same units for different prices had come under pressure, and some agreed to put forward a one-off cash compensation scheme. The wave of real estate discounts has also spread to nearby cities like Ningbo and Wenzhou.
Beijing
Beijing has also been hurt by gloomy market. Between September 29 and Oct 4, trading volume for housing units dropped 72% compared with the same period last year, according to data posted on the Beijing municipal real estate management website. During that week, 412 units were sold, or an average of 69 units per day.
Discounts were also being offered to boost sales. For instance, on September 25, a housing township named Flower City had offered a model of a two-bedroom apartment measuring some 100 square meters for 6,981 Yuan per square meter. The published price was more than double that, initially 15,000 Yuan per square meter.
According to a report posted on Beijing Statistical Information Bureau website, real estate market indications had showed signs of declining this year due to a combination of macro controls, especially in the third quarter of the year.The report stated that sales of housing units continued to be slow, but prices remained high.
Industry players believed the current slump in trading volume was temporary, as property prices had in past months rose too much beyond homebuyers' expectation. Moreover, uncertainties in the domestic and global economy had also put off investors
Shanghai
In Shanghai the real estate prices have gone down over 20-25 % and people are reluctant to buy newer properties and the Shanghai Municipality has already embarked on the reform and regulation of the sector by establishing a special Commission for the real estate sector.
In City Centre the prices have gone down and people are buying properties in outskirts and suburbs of Shanghai at rate of about 12000-15000 Yuan per square meter instead of buying over 20000 Yuan per square meter in the city centre.
Over all the lowering of prices in major cities of China shows the vulnerability and speculation involved in the real estate sector. Recent land reforms can further boost the real estate sector but its centre will not be big urban areas rather new emerging areas…this is the policy of Chinese authorities at the time. This will be more complex and more arduous development after the reforms of last 3 decades.
Conclusion:
The diversity and range of the crisis shows that it has affected broad areas of Chinese economy. This has not been more severe due to insularity of Chinese banking and Stock exchanges to foreign influences thus the panic situation has not been observed. But the symptoms and tentacles of crisis are visible every where from financial sector to SMESs. This global integration of Chinese market has posed challenge to Chinese market to restructure and readjust to present age of crisis.
China's tax revenue growth had slowed for two consecutive months in July and August, adding pressure to the drafting of 2009 budget, which would likely see expanded spending for stabilizing prices and rebuilding natural disaster-hit areas while state income slowing. Sources from the Finance Ministry told the Economic Observer weekly that all central government agencies had been asked to cut spending on civil servants' working trips, meetings and overseas study trips, among others, to attain zero growth in staff expenditure in next year's budget. This shows the practical results of impact of crisis on production of the country.
In the fallout of the US financial crisis, majority of market observers have projected Chinese exports would decline further as American consumers tightened their belts for leaner days; however, some also held that consumers under spending pressure would opt for cheap made-in-China products, thus limiting risk of a big drop in demand. In addition, China's huge foreign reserve in US dollar would depreciate in value. Chinese think tanks were against China in rushing in to buy ailing US financial institutions, instead, they suggested targeted acquisition on those with mining resources portfolio or extensive financial services network, adding such investment should be gearing for a seat in the board of director or some form of management control.
Recent shut down of the industries and manufacturing smaller units is seen as opportunity in the Government circles and they are hoping that this relocation will shift the low productive and less technological sophisticated concerns to hinterland of China thus paving way for the more technological developed manufacturing units to be developed in Pearl and Yangtze River Delta regions. If this policy is successfully implemented then the region can come stronger and developed as compared to before. But this will depend upon the trends and strengths of world economy, health of financial systems, domestic market and pace and direction of reforms. As the Chinese are themselves saying a long winter has set in the Chinese economy …and every one is eagerly waiting for spring but without any clue to its real colors!
Decoupling , the theory that Chinese economy is independent and is not dependant upon USA and EU market has been tested severely under the after math of the recent financial crisis in Global markets, especially financial and stock exchange markets. This shows that the world economy is truly global in scope practical implications. The impact of global crisis is explored in the context of financial, manufacturing and stock exchange of China.
"Decoupling holds that European and Asian economies, especially emerging ones, have broadened and deepened to the point that they no longer depend on the United States for growth, leaving them insulated from a severe slowdown there, even a fully fledged recession. Faith in the concept has generated strong outperformance for stocks outside the United States - until now." Reference International Herald Tribune
Financial investments abroad and Chinese losses
In China the impact of international financial crisis has been varied and it has not been open and clear due to lack of transparency and information gathering in China. In financial field China Investment Corp., the sovereign wealth fund that bought stakes in Morgan Stanley and Blackstone Group LP before their stocks plunged, may have as much as $5.4 billion frozen in a U.S. money-market account. Stable Investment Corp., an affiliate of Beijing-based CIC, was the largest shareholder in Reserve Primary Fund on Sept. 1, according to regulatory filings. Reserve Primary suspended withdrawals after becoming the first U.S. money- market fund in 14 years to leave investors with losses. Stable Investment had about $6 billion in additional U.S. money-market funds earlier this year. China, which has primarily held its $1.8 trillion in currency reserves in low-yielding U.S. government debt, set up CIC last year to put about $200 billion into assets with higher rates of return, such as stocks and corporate bonds. It invested $5 billion in Morgan Stanley, the second-biggest U.S. investment bank, and $3 billion in buyout firm Blackstone, manager of the largest leveraged buyout fund. Both New York-based companies have lost more than 70 percent of their market value since the purchases.
CIC devoted most of its money to domestic banks, and has about $35 billion remaining for global investments, according to McCormack at Z-Ben, which consults on China's money- management industry. The fund had placed $11 billion in U.S. money-market funds, according to filings with the U.S. Securities and Exchange Commission. It may be using the money funds to park cash until selecting outside money managers to help it invest, said Brad Setser, a fellow for geo-economics at the Council on Foreign Relations, a New York-based think tank.``. It has taken them awhile to figure out what they want to invest in,'' Setser said. This shows the cautious policy adopted in aftermath of the financial crisis by Chinese authorities
Depending on its performance, CIC may be allocated as much as $1 trillion of China's foreign exchange reserves, according to Michael Martin, an Asian trade and finance analyst at the U.S. Congressional Research Service in Washington.
A Sept. 29 2008, SEC filing shows that Stable Investment held 11.1 percent of Reserve Primary's institutional shares at the beginning of the month. Based on the 48.9 billion institutional shares outstanding as of May 31, the most recent information available, Stable Investment's stake would have totaled about $5.4 billion.
Stable Investment has also invested roughly $5.9 billion in three other U.S. money market funds, according to documents filed earlier this year with the SEC. That includes $2.1 billion in the Invesco Aim Liquid Assets Portfolio; $2.3 billion in the JPMorgan Prime Money Market Fund; and $1.5 billion in Deutsche Asset Management's DWS Money Market Trust.
By Sept. 16 2008, the day after Lehman had filed for bankruptcy protection, investors had sought to withdraw $40 billion from the $62.5 billion Reserve Primary fund. Reserve Primary ended up releasing $10 billion at a rate of $1 a share. The last value published for the fund was 97 cents a share. Reserve Primary's loss triggered a widespread run in which investors withdrew $133 billion from U.S. money-market funds the following two days.
Reserve Primary is liquidating its assets and expects to make an initial distribution of $20 billion to remaining investors .The situation became clearer when China Investment Corp. (CIC), operator of the country's sovereign wealth fund, on 15 October 2008 said it had given notice to the Reserve Primary Fund, a U.S. money market fund, to withdraw all its investment before the latter's suspension announcement.
Bloomberg reported on 13 October 2008 ,that CIC may have as much as US$5.4 billion frozen as the Reserve Primary Fund suspended withdrawals last month. The Reserve Primary Fund suspended redemption last month because of losses on debt issued by bankrupted Lehman Brothers.A U.S. regulatory filing showed Stable Investment Corp. was the biggest institutional shareholder in the U.S. monetary market fund with a stake of potentially more than US$5 billion.
CIC confirmed its investment in the Primary Fund, but said it would not be subject to the possible 3 percent losses incurred by the Reserve Primary Fund. The fund announced investors who hadn't made a withdrawal before the redemption suspension may be subject to the 3 percent principal losses.
The Sovereign wealth fund, with capital of US$200 billion from the country's huge foreign exchange reserve, has attracted great attention at home as its two major investments in Blackstone and Morgan Stanley suffered losses during the ongoing financial crisis.
China Investment Corp., the government's sovereign wealth fund, may raise its stake in U.S. investment group Blackstone LP after the two agreed to boost the Chinese company's ownership limit.CIC had paid $3 billion for a stake in Blackstone's June 2007 initial public offering, but has seen the value of that investment sink in the bear market, to the consternation of many in China.
According to a regulatory filing, a revised agreement reached on 16 October 2008, between Blackstone and CIC unit Beijing Wonderful Investments Ltd. has raised the limit on the Chinese company's stake to 12.5 percent from 9.99 percent. The filing with the U.S. Securities and Exchange Commission, posted on Blackstone's Web site, did not require regulatory approval.
There was no official comment from CIC on its plans for additional share purchases. At the time of Blackstone's IPO, its shares were valued at $31 apiece. On Thursday, they rose 1.7 percent to $9.36.The $200 billion investment arm of the Chinese government was set up to make profitable use of Beijing's foreign reserves, which totaled $1.9 trillion by the end of September 2008.
CIC's biggest investment to date was a $5 billion investment in Morgan Stanley, one of nine major banks now seeking relief from the deepening credit crisis through the U.S. government's $700 billion banking bailout. That purchase will give it a 9.9 percent stake in the investment bank.
The Chinese sovereign wealth fund also invested more than $100 million in Visa Inc.'s $19.1 billion IPO and has invested in a fund managed by J.C. Flowers, a U.S. private equity firm.
Stock , Commodities Market and Economic Crisis :
Shanghai Stock Exchange is the bench mark fro Main Land China and it has also been victim of the crisis in a drastic way. SSE has lost over 60 % of its value than its peak value a year ago and the slide has been steady and it has not been able to correct its balance after the global crisis. The SSE closed on 1833.26 points on 17 October 2008. This is at its historical lowest points.
China’s securities watchdog has warned listed state-owned enterprises against trading speculatively in the futures market as it acts to contain risks amid volatility in the global commodity markets. The SOEs can only use futures contracts as a hedging tool and must strictly control risks, China Securities Regulatory Commission, said in a Website statement . "China is highly reliant on imports of raw materials, but their prices are determined by overseas futures prices." However, the United States subprime crisis triggered volatility in futures prices and companies faced higher risks. So hedging in overseas futures market plays an important role in helping companies keep risks at bay and also helps them control costs while they aim to be profitable."The risks are manageable as long as we adhere to the principle of hedging," CSRC noted. Crude oil, copper, palm oil and rubber fell yesterday on concerns that sales will plummet.
The Chinese banking regulator on 16 October 2008 urged financial institutions to step up their supervision in face of world economic turmoil. The China Banking Regulatory Commission is requiring institutions in the banking industry to tighten up its credit management and avoid embezzlement of funds to the stock market. Control over property-related credit should be strengthened to encourage normal consumption, strike down on speculative activities and support the rational development of the real estate industry, said the commission. It also urged commercial banks to make better preparations for possible losses, asking them to increase provisions.
Manufacturing Sector … Economic Crisis and Relocation
The majority of China’s exports are destined to USA and EU market so the present crisis has played a dominant role in affecting the manufacturing base of the Chinese export dependant industries.
The toy market especially and new export orders have been affected at a broad spectrum of companies in China. Many big companies dealing in Christmas toys like Santa Claus' outsourcing operation is being affected by deepening US economic woes--US orders for Christmas products made by Chinese manufacturers have dropped off a cliff.
Roosevelt Gift Manufacturing Company in Xiamen, Fujian province is one of the three largest craft manufacturers in Xiamen, who mainly produces Christmas products for the America market."Nowadays, the business environment at home and abroad is poor. On the one hand, we have to face pressures from rising costs and Yuan appreciation; on the other hand, many orders have evaporated due to weaker US market demand," company’s representative Yuki said. She also said her company was searching for counter-measures. For instance, since later last year, the company had switched its target market to Europe out of concerns over its US partners' likeliness to breach contracts. But even the European market is unpredictable.
The firm even tried to squeeze costs by simplifying their products. "The US clients were more interested in lower prices, because expensive Christmas gifts may not be popular," Yuki said. She added the company had considered marketing domestically but was frustrated by thinner profit margins and complicated marketing channels.
Roosevelt is not an isolated company in this squeezing environment. Zhejiang province's Yiwu County, one of China's major Christmas product exporting bases, is also facing a colder market.
He Songping, president of Yiwu Zhong Sheng Crafts Company, which makes Christmas trees, told the EO that orders from the US have shrunk over 50%. Furthermore, since steel prices have jumped 30%, despite simplifications to product design his firm's products are still 15% more expensive.
The trend reaches beyond Christmas paraphernalia. Yiwu's export volume with the US registered negative growth for three consecutive months earlier this year. In April, local enterprises began to diversify their markets, and from May, Europe replaced the US to become Yiwu's largest exporting market.
A professional market consultant institute forecast a further decline in the trade against US and the US financial crisis would be bound to jeopardize its real economy. Under such condition, China had better diversify its exporting market like opening up new market in Middle-East, South Asia and Latin America areas.In America, consumers would often queue for shopping during the month-long golden shopping season that ran from Thanksgiving to Christmas Day. The season has traditionally contributed nearly half of total revenues and profits to US retailers. In the US, Christmas is not only a festival but also a huge economic cake.
However, Santa seemed likely to be less generous in year 2008. Owing to the bad economic situation last year, Christmas spending on the average child stood at around 200 dollar in the US. However, many families planned to halve that spending in year 2008 , because nobody wants to face a heap of credit card bills after the holidays. In addition, the unemployment rate in America is climbing and many people are living off of social welfare services."On September 23 2008, the US National Retail Federation forecasted weakness in the US retail business. The federation contributed the reason to the downturn in the real estate market, climbing unemployment and rising food prices.
When interviewed by the Wall Street Journal, Laurence Meyer, vice-chairman of the board at Macroeconomic Advisers, a US-based economic forecasting firm, said that "The worst-case scenario is that the Fed loses its ability to stimulate the economy further as the funds rate moves to zero."
His firm sees the U.S. unemployment rate rising to 7% next year; though he says it could go to 8% or even higher if credit markets don't improve.
Recent example of lost orders and impact of global crisis is showing itself in bankruptcies and on 16 October 2008 a town government in Guangdong Province has paid 24 million Yuan (US$3.51 million) in emergency living allowances to about 6,500 workers after the world's largest toy maker announced two factories of the town were bankrupt. The companies relied heavily on exports to the United States with 70 percent of all toys being sold to that market, the report said. Analysts said the bankruptcies were the result of the ongoing US credit crisis and that it was the first bankruptcy case on the Chinese mainland due to the global financial turmoil.
There was already a spreading of the crisis in Jiangsu, Shanghai, Zhejiang about 50 % toy manufacturers of Small and Medium Size entrepreneur , textile manufacturers and other consumer goods have already gone bankrupt and the ratio is increasing day by day as the crisis deepens more and more . Chinese government is asserting that they collapsed due to lower efficiency in management and higher cost of production. But the appreciating Yuan has also affected the fortunes of these SMEs. The Chinese government has raised rebate of textile exports to 13 % to counter the affects of global crisis, appreciating Yuan and increased costs.
The trend of these closures and bankruptcies is going to be longer and protracted in days to come and government is also planning to develop new policies to tackle this crisis.
Real Estate Crisis.
The development boom in China in real estate developed huge projects and resulted in increase of prices of housing units across the major cities of China. As the economic slow down and increased inflationary pressure has set in. This has prompted the wave of housing price cuts appearing to have swept across major cities in China after the Olympics. Property developers in Shenzhen, Southern Guangdong province, were among the first to slash prices to boost the sluggish local real estate market. The move, however, triggered a domino effect across the country, with developers in Hangzhou, Beijing, Shanghai and other large cities following suit.
Shenzhen
In the first week of October, the daily-average price for houses traded in Shenzhen had tumbled below 10,000 Yuan per square meter, an important psychological barrier used to measure the decline of the market.
Traditionally, the period from September to late-October has been the high season for property markets. However, the annual Shenzhen autumn fair for real estate that opened on September 29 had dismaying results, according to participating developers.
Based on data released by the Shenzhen bureau of land resources and housing management on October 2, that day alone 64 units of new houses, measuring 5,222 square meters in total, were sold for 50.13 million Yuan.The above trading volume averaged out to 9,599 Yuan per square meter--the lowest daily-average price recorded in the City in 18 months.
According to the Bureau's latest market analysis report for the months from January to August, the real estate market had remained sluggish since June.The report said in August, the city recorded an average property price for housing units at 14,448 yuan per sq m, a drop of 16.7% compared to the average price ten months ago.
Hangzhou
Real Estate Developers in Hangzhou were also plagued by lower prices and trading volume. Since early-September 2008 , developer Vanke had taken the lead in offering discounts and others followed suit, with some offering cuts up to some 30%.
For example, by mid-September 2008 , prices for new properties in a township named Qianjiang New City lingered between 12,000 and 13,000 per square meter after discount--some 5,000 Yuan per square meter lower than properties in the surrounding neighborhoods.
Upon learning of the price slash, some eager buyers queued overnight to compete for limited units. Some crashed the developer's sales office to protest "old" home purchases, who had paid higher prices for similar units when the township was first launched. Protesters were holding banners and threatening to withdraw their purchases.
Some developers who had practiced double standards in offering same units for different prices had come under pressure, and some agreed to put forward a one-off cash compensation scheme. The wave of real estate discounts has also spread to nearby cities like Ningbo and Wenzhou.
Beijing
Beijing has also been hurt by gloomy market. Between September 29 and Oct 4, trading volume for housing units dropped 72% compared with the same period last year, according to data posted on the Beijing municipal real estate management website. During that week, 412 units were sold, or an average of 69 units per day.
Discounts were also being offered to boost sales. For instance, on September 25, a housing township named Flower City had offered a model of a two-bedroom apartment measuring some 100 square meters for 6,981 Yuan per square meter. The published price was more than double that, initially 15,000 Yuan per square meter.
According to a report posted on Beijing Statistical Information Bureau website, real estate market indications had showed signs of declining this year due to a combination of macro controls, especially in the third quarter of the year.The report stated that sales of housing units continued to be slow, but prices remained high.
Industry players believed the current slump in trading volume was temporary, as property prices had in past months rose too much beyond homebuyers' expectation. Moreover, uncertainties in the domestic and global economy had also put off investors
Shanghai
In Shanghai the real estate prices have gone down over 20-25 % and people are reluctant to buy newer properties and the Shanghai Municipality has already embarked on the reform and regulation of the sector by establishing a special Commission for the real estate sector.
In City Centre the prices have gone down and people are buying properties in outskirts and suburbs of Shanghai at rate of about 12000-15000 Yuan per square meter instead of buying over 20000 Yuan per square meter in the city centre.
Over all the lowering of prices in major cities of China shows the vulnerability and speculation involved in the real estate sector. Recent land reforms can further boost the real estate sector but its centre will not be big urban areas rather new emerging areas…this is the policy of Chinese authorities at the time. This will be more complex and more arduous development after the reforms of last 3 decades.
Conclusion:
The diversity and range of the crisis shows that it has affected broad areas of Chinese economy. This has not been more severe due to insularity of Chinese banking and Stock exchanges to foreign influences thus the panic situation has not been observed. But the symptoms and tentacles of crisis are visible every where from financial sector to SMESs. This global integration of Chinese market has posed challenge to Chinese market to restructure and readjust to present age of crisis.
China's tax revenue growth had slowed for two consecutive months in July and August, adding pressure to the drafting of 2009 budget, which would likely see expanded spending for stabilizing prices and rebuilding natural disaster-hit areas while state income slowing. Sources from the Finance Ministry told the Economic Observer weekly that all central government agencies had been asked to cut spending on civil servants' working trips, meetings and overseas study trips, among others, to attain zero growth in staff expenditure in next year's budget. This shows the practical results of impact of crisis on production of the country.
In the fallout of the US financial crisis, majority of market observers have projected Chinese exports would decline further as American consumers tightened their belts for leaner days; however, some also held that consumers under spending pressure would opt for cheap made-in-China products, thus limiting risk of a big drop in demand. In addition, China's huge foreign reserve in US dollar would depreciate in value. Chinese think tanks were against China in rushing in to buy ailing US financial institutions, instead, they suggested targeted acquisition on those with mining resources portfolio or extensive financial services network, adding such investment should be gearing for a seat in the board of director or some form of management control.
Recent shut down of the industries and manufacturing smaller units is seen as opportunity in the Government circles and they are hoping that this relocation will shift the low productive and less technological sophisticated concerns to hinterland of China thus paving way for the more technological developed manufacturing units to be developed in Pearl and Yangtze River Delta regions. If this policy is successfully implemented then the region can come stronger and developed as compared to before. But this will depend upon the trends and strengths of world economy, health of financial systems, domestic market and pace and direction of reforms. As the Chinese are themselves saying a long winter has set in the Chinese economy …and every one is eagerly waiting for spring but without any clue to its real colors!
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