This was published 15 years ago
The sky is blue and the smokestacks are sorely missed
China's domestic economy is slowing, but no-one really knows how much.
By John Garnaut
IT IS NOW eight weeks since Beijing waved goodbye to the Olympic Games and yet the sky remains an eerie, brilliant blue. The world is waiting for China's smokestack economy to roar back to life.
Only weeks ago it seemed China might provide an island of growth that would keep Australia afloat while the rest of the world fell apart.
How could a Wall Street credit crisis knock over a country with closed capital accounts, where shops do not take credit cards and where people buy apartments with suitcases of cash?
What could go wrong domestically when incomes are rising, employment is high, inflation is falling and a few hundred million people are hauling themselves from poverty and into their first car and a white-tiled two-storey village house?
China's real estate market was slow, but it would recover because 12 million urban migrants needed new homes each year. The sharemarket had collapsed, but that did not matter because it had risen so fast and relatively few people were exposed.
Construction had softened and car sales were weak but that is what you would expect when much of northern China was shut down for three months to clear the Olympic air. The economy would bounce back with all that pent-up demand.
And if for some reason the story did not pan out, then the Government would unlock its vast budget vaults, remove its lending controls and immediately kick the economy back to life.
But that is not happening.
Today China's bureau of statistics will tell us that annual GDP slowed in the September quarter from 10 per cent in June and 12 per cent in December. But the figures will not necessarily shed much light.
"We're forecasting 9.5," says Stephen Green, of Standard & Chartered in Shanghai. "But we're trying to forecast what they're telling us rather than reality.
"Exports are down, investment is down, government spending is down and private consumption is down. It's very difficult right now to draw the line between complacency and panic."
Exporters have been panicking all year, for obvious reasons, as Western consumers rein in their discretionary spending and the Chinese currency surges, on a trade-weighted measure. Factories are closing their doors all along China's southern coast.
Now builders are panicking, and so too are the steel and aluminum producers who supply them. It is hard to find reliable real estate data anywhere, least of all in China. But most measures show real estate turnover has collapsed in most big cities, and prices are beginning to follow. Average prices remain above the levels of a year ago but appear to have been steadily falling for four months.
Completed apartment and commercial blocks stand empty all across the country. It now seems the only thing that rose faster than Chinese demand for new housing was Chinese supply.
The sharemarket bounced 25 per cent when the Government intervened last month. Those gains had evaporated by the end of last week, with the market down 68 per cent from its peak exactly a year earlier.
The sharemarket is now in effect closed to builders and other investors who would normally be tapping it for funds. Caijing magazine reports that 34 firms have had their listing plans suspended because of market volatility and regulatory concerns. Dozens of others gave up before they got that far.
And it seems even China's debt-free consumers can suffer from a "wealth effect", as they cut down on big-ticket discretionary purchases.
Car sales rose 23 per cent last year and 17 per cent in the first half of this year. In August they fell 6.2 per cent from a year earlier, and last month they were down 1.4 per cent. Anecdotal reports for this month are grim.
There are signs that China's sudden industrial slowdown is spreading. Retail sales remain healthy, but they are slowing. The transport industry has hit the skids. Air China warned that it would post huge losses in the September quarter as passenger numbers declined.
And one day soon the Government will have to give in to industry demands for bail-outs because unemployment is beginning to mount. The trouble is that pump-priming the economy will only exacerbate the over-reliance on fixed investment and heavy, polluting industry that policy makers have fought so desperately to unwind.
The Government could help out exporters by halting the recent (trade-weighted) appreciation of the yuan, but that would only exacerbate Chinese and global imbalances. Or it could restore official largesse by ending restrictions on official cars, travel and "banquet money" that it imposed after the Sichuan earthquake.
All of these could save jobs now but create larger problems down the track. "It would be accelerating up a dead end," says Stephen Green.
The long-term China story remains on track. Meanwhile, as the country goes from adding 50 million extra tonnesof steel production each year to possibly eliminating that much, Australia is finally getting its export act together. Australian mining companies sent record iron ore shipments last month, and Brazil posted a near-record.
Supply has finally caught up to demand just as demand has collapsed. Negotiations for next year's contract prices will be painful to watch.