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Of Socks And Bras That Just Won’t Sell: China Is Getting Desperate

December 20, 2009

Of Socks And Bras That Just Won’t Sell: China Is Getting DesperateMartin McCauley writes: Crystal ball gazing is all the rage at the end of the first decade of the 21st century. So what about the prediction that this is going to be the Chinese century? Is it all hot air or should we all learn to say Ni hao, hello in Chinese? And do we need a Mandarin phrase book to navigate in this brave new world?

The good news, folks, is that you won’t need to learn Chinese any time soon. China is not going to rule the world. How do I know? Well, by analysing what the Chinese leadership is actually saying to its own people. The leaders in China are nervous and not at all optimistic about the future.

You would never guess this from the world press or the bankers. The financial community is so desperate for good news that it has talked up Chinese economic success. Beijing is going to drag the world out of recession, they claim. That is because the Chinese economy is going to grow by 9 per cent in 2010. This ‘phenomenal success story’ sounds all the more exciting,  given the sad state of things in Western countries.

But hold on! How is it exactly that Beijing is going to get all that growth when the world is in recession? Surely, Chinese economy depends on exports to grow? About a quarter of its factories produce for export and they also contribute about a quarter of Gross Domestic Product growth annually. They produce practically all the socks, bras and other items of clothing and underwear worn by the world. Of late, men have been wearing their socks longer and learning to darn them when a hole appears. Women have been told to cut their spending on new bras. America, the land of endless demand, has turned into a country of frugal spenders.

So what do Chinese factories do with all the consumer goods which they cannot sell abroad? They actually add them to their inventories. All attempts to convince Chinese consumers to spend more – they are the world’s greatest savers – have so far fallen on deaf ears.

And this is not end of the bad news. Chinese banks have splurged out about $1.2 trillion in loans to state owned enterprises (SOEs). What have they done with the sudden cash inflow? Speculated on the property and stock markets. Anything left over has been used to expand their enterprises. But this makes no sense at a time when world demand is stagnant. One Beijing consultancy reckons that at least one in six of the loans extended will never be repaid. That is a whopping $200 billion down the drain.

It is also becoming more and more difficult for China to acquire prized foreign assets. True, they have bought some, but the really big ones have gotten away. The worst fiasco was the refusal of the Australian government to permit Chinalco (a Chinese SOE) to invest $19.6 billion in Rio Tinto in order to increase its stake in the minerals company. American regulators will not permit Chinese SOEs to acquire strategic assets in the United States. China lobbied successfully at the G20 summit in London, in April 2009, to keep Hong Kong off the list of offshore tax havens to be investigated.

Headlines in the Western press claim that China held the world to ransom at the disastrous Copenhagen climate conference. Has Beijing suddenly become a superpower? No, this was the exaggerated reaction to China refusing to have independent inspectors travelling around the country to verify emission levels of CO2 gases. The green lobby is outraged and the global warming sceptics are delighted.

The ethnic riots in Tiber and Xinjiang, both resource rich areas, were a disaster for Beijing in 2009. More resources will have to be poured into these regions to pacify the local population. They believe that Han Chinese are being unfairly favoured. It will take more than sweet talk to overcome their bitterness.

Inflation will rise in China and banks will be faced with an increasing pile of bad debts. The world will learn to do without cheap Chinese goods.

So, folks, have a great Christmas and stop worrying about a Chinese takeover of the world. It ain’t going to happen.

– End –

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