Tuesday, 4 November 2008

China Will Save Us...... Not

Whilst it has now been acknowledged that the Chinese economy has slowed, there is still a lot of talk about how the voraciaous demand for commodities by the Chinese economy will underpin Australian economic growth. However, there are growing signs that China is slowing much more than those wearing the rose coloured glasses expect. From the LA Times:

Some owners deserting factories in China

Reporting from Shaoxing, China -- First, Tao Shoulong burned his company's financial books. He then sold his private golf club memberships and disposed of his Mercedes S-600 sedan.

And then he was gone.

And just like that, China's biggest textile dye operation -- with four factories, a campus the size of 31 football fields, 4,000 workers and debts of at least $200 million -- was history.

"We're pretty much dead now," said Mao Youming, one of 300 suppliers stiffed last month by Tao's company, Jianglong Group. Lighting a cigarette in a coffee shop here, the 38-year-old spoke calmly about the bleak future of his industrial gas business. Tao owed him $850,000, Mao said, about 60% of his annual revenue. "We cannot pay our workers' salaries. We are about to be bankrupt too."

Government statistics show that 67,000 factories of various sizes were shuttered in China in the first half of the year, said Cao Jianhai, an industrial economics researcher at the Chinese Academy of Social Sciences. By year's end, he said, more than 100,000 plants will have closed.

As more factories in China shut down, stories of bosses running away have become familiar, multiplying the damage of China's worst manufacturing decline in at least a decade.

Even before the global financial crisis, factory owners in China were straining under soaring labor and raw-material costs, an appreciating Chinese currency and tougher legal, tax and environmental requirements. When the credit crunch took hold -- prompting Western businesses to slash orders for Chinese goods and bankers to curtail loans to factories -- many operations were pushed over the edge.

It's worth reiterating again that China derives approximately 40% of its GDP from exports and as the US economy falls more deeply in recession dragging global demand down with it, China will defintiely feel the effects. That's why a year ago I called the concept of "decoupling" a myth.

Also of note today the RBA slashed the cash rate by another 75bps after cutting 100 bps last month. Maybe the RBA doesn't think China will save the day either? As mentioned before I wouldn't be surprised to to see the cash rate get as low as 3% some time next year. However don't expect the banks to able to match the RBA cuts as their funding costs remain elevated.