China

The Coming Collapse Of Consumption In China

Gordon Chang

Forbes,

1 October 2012

On Friday, Nike shares declined 1.1%, largely on China concerns. The world’s largest sporting goods company reported that Chinese orders were down 6% when analysts had expected them to rise 1.2%.

The only real surprise is that almost no one saw this coming. Rahul Sharma, founder of Neev Capital, maintains investors overreacted to Nike’s China problems, saying they should have been paying attention. It’s no secret Nike has been carrying excess inventory in China, and this had led to discounting that in turn hurt sales of new products.

Company after company is reporting softening Chinese consumer demand. Most notably, Burberry’s Chief Financial Officer Stacey Cartwright blamed China as her company released discouraging guidance earlier this month. Its stock dived 21%, the worst one-day loss since the retailer went public in 2002.

Investors still believe consumption will carry the Chinese economy past its current difficulties. And on the surface, China’s shoppers appear resilient. The National Bureau of Statistics reported that retail sales increased 13.2% in August year-on-year. Moreover, the People’s Bank of China is apparently expecting a stellar National Day. Days ago, the central bank completed the biggest weekly net injection of cash in China’s history—365 billion yuan—to meet expected demand during the week-long holiday.

Yet even official statistics are starting to reveal the slowdown in consumption. For one thing, the current retail-sales figures represent a deterioration from the second half of last year, when growth ranged from a low of 17.0% in August to a high of 18.1% in December. Moreover, current growth rates are also below those in the beginning of this year: the aggregated January-February period clocked in at a still-healthy 14.7%, and March posted a 15.2% gain.

The downward trend in the figures becomes even more worrying when you strip out of them inflation and exclude government procurement and store inventory, which are inexplicably included. The growth of “retail sales” in China, at least as we think of the term, is probably in the low single digits at the moment.

Problems in the retail sector are highlighted in the most recent China Beige Book, which is based on a survey conducted by New York-based CBB International from August 9 to September 3. It both confirms a slowing of Q3 retail growth and shows retailers less optimistic than they were three months earlier. That’s because the closely watched survey, modeled on the one by the U.S. Federal Reserve, reveals a decrease in the number of companies hiring and an increase in those cutting staff. The number of businesses cutting wages more than doubled from the previous survey, and there has been an increase in store inventories.

Retail is heading even lower as take-home pay and investment income fall. “We should be on the cusp of a jump in industrial unemployment,” states J Capital Research’s Anne Stevenson-Yang in her September 29 e-mail alert from Beijing.

She has to be right. Foreign enterprises are starting to ditch staff. China is the nation hardest hit by the layoffs at the Motorola “mobility” division after its acquisition by Google: 1,400 employees out of 4,000 worldwide. The company let go staff in Shanghai, Nanjing, Hangzhou, Tianjin, and Beijing. Adidas shut its last wholly-owned factory, and Panasonic, Nokia, and Denmark’s Vestas are cutting staff.

Even large state enterprises are throwing in the towel. This month, Baosteel Group, China’s biggest steelmaker, announced the closure of a mill in Shanghai due to falling demand for steel plate. The enterprise was the first to shutter a steel plant. Other operators tolerate low capacity because they receive low-interest loans and subsidies from local governments, but soon they will have to close facilities too.

And as goes steel, so goes China. Other industries—think solar panel makers—are in worse shape and will eventually have to cut operations as well. Already, there are protests as employees demand payment of back wages. The country’s economic slowdown is beginning to affect social stability, and this in turn further undermines the overall economy.

Stevenson-Yang notes that the purchasing managers’ indexes are the best way to forecast the demand for employment. The HSBC new orders sub index has been dropping at a time when companies are gearing up for Christmas. No surprise then that a recent J Capital survey indicates that large manufacturers are getting ready to shed workers.

Don’t expect to see an increase in joblessness in the country’s official figures, however. Beijing’s Ministry of Human Resources and Social Security reported that the urban unemployment rate at end of this year’s second quarter was 4.1%, unchanged from the middle of 2010. In fact, the sensitive jobless rate, which is well below this year’s national target of 4.6%, has barely moved a tenth of a percentage point since 2003.

Nobody believes the accuracy of the unemployment number. The Chinese Academy of Social Sciences released an 8.7% unemployment figure in 2008, but the prestigious institution has been silent since.

Beijing’s jobless statistics do not count migrant workers, who number as many as 250 million. Also left out are women over 45 and men over 50 as they are considered retired, graduates out of school for six months or less, laid-off state workers still receiving payments from their former employers—perhaps 40.5 million in this category—and those not registered for unemployment. Unemployment, in fact, is high, somewhere in the teens. Disposable income is therefore taking a hit. And an apparent fall off in investment income is not encouraging the Chinese to shop either.

Naturally, many analysts see the solution to faltering consumption in a general pickup in the economy. As Zhu Haibin of JPMorgan Chase in Hong Kong says, “if policy efforts can boost corporate sector investment and profitability, consumption may come naturally.”

There’s a measure of truth in Zhu’s comment, of course, but we have to remember that, as central government technocrats implemented their stimulus program beginning in 2008, they unbalanced the economy even further with massive amounts of state investment. Retail spending increased in absolute size in the resulting recovery, but it plummeted as a percentage of gross domestic product. Today, no nation has a more unbalanced economy.

The ultimate answer is to increase the percentage of household consumption from the current 34% or so. As Premier Wen Jiabao in March declared, “Expanding domestic demand, particularly consumer demand, which is essential to ensuring China’s long-term, steady, and robust economic development, is the focus of our economic work this year.”

That task is difficult in the best of circumstances, but it cannot be accomplished in a downturn. And in any event, it takes years for any strategy to succeed. China’s investment-led, export-heavy growth model is, by its nature, anti-consumption.

And Chinese leaders are beginning to understand they cannot change the model. This month, the official Xinhua News Agency issued a story with this headline: “China Plans Slower Growth in Domestic Consumption.” No, Beijing’s leaders are not planning a smaller contribution of consumption to GDP, but, yes, that is what is in fact happening.

Technocrats can see what is about to occur: Chinese consumption is now on the verge of collapsing.