Factories in China Starting to Struggle
in the Economic / Financial Storm
Global financial and economic turmoil have weakened demand substantially in China’s two biggest markets: Europe, which consumes about 20.5 percent of China’s exports, and the United States, which consumes about 17.5 percent. Demand is also weakening in Hong Kong (which consumes 13 percent to 15 percent), Japan (8 percent to 9 percent) and the ASEAN countries (about 8 percent) as they experience their own problems from recession in the West. Lower demand abroad causes trouble for China’s coastal industries, which thrive almost entirely on exports. These industries are crucial components of China’s overall system and the government can not allow them to fail as they are responsible for about 40 percent of China’s gross domestic product. Already unemployment is becoming a larger burden on Chinese cities, and it is creating disruptive migration patterns as laid-off urban workers return to their home regions looking for work. Throughout September and October, the Chinese leadership has moved to prop up manufacturers and export industries with tax rebates and direct subsidies, and hoped to quite things with cheap credit by loosening monetary controls so they can borrow their way out of the crisis.
The China Economic Review reported in December 2008 that
As Western growth slows, demand for Asian goods is dropping, and Asians countries are having to either shut factories down or subsidize them to keep operations continuing. China’s National Bureau of Statistics reported Nov. 11 that the consumer inflation figures for 2008 had dropped dramatically since sharp commodity price spikes in the first half of the year. The consumer price index demonstrated that inflation had fallen to 4 percent (a 17-month low) in October, down from 4.6 percent in September. The statistics made for a sharp contrast with the first 10 months of 2008, when the consumer price index grew an average of 6.7 percent year-on-year as a result of price hikes in food and energy. In China which depentd on an export-driven economy, the news gives rise to fears of deflation. This is because in normal times, when an Asian exporter flood world markets with goods, the effect is good for importing consumers. Their purchasing power is enhanced, so they are encouraged to buy more goods. With inflation effectively out of the picture, governments can pursue easy monetary policies that boost consumption without worrying too much about prices being bid up. Ideally, export-based economies can ease their deflation by shipping surplus goods elsewhere and spurring consumption among the importers. But there is a danger for the export-oriented economies in this situation. Their tactic implies that they do not have vibrant domestic demand, and therefore have no choice but to sell their products to foreigners, sometimes even at a loss. If foreign markets become depressed, however, deflation can spread. If consumers become too accustomed to prices getting marked down again and again, they will eventually delay purchases in anticipation of better deals in the future. As consumption slows and supply continues to increase, prices everywhere swirl further and further downward in a spiral of deflation that is hard to stop.
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