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So, How Does the Carnage Look from Ground Level?

10/31 Halloween Update: A lot has been made of the seeming difference in my post here (it’s bad and getting worse) and another good post on Shenzhen Undercover (it’s been planned and happening for a while).  China Law Blog and 3PL Wire both picked on the “conflict.”  I’m personal not seeing any conflict.  In fact, my 6th point below points out that yes, this movement is both planned and has been happening from at least least year on.  I press that things were changing last year, have worsened this year; the timing of the international recession coincided with a year when change in Guandong and national level economic breaks weren’t supposed to hurt this much–so it’s unintentionally bad and the bleak numbers will continue.  Shenzhen Undercover, if I may summarize, details what Shenzhen is doing specifically to move up the product food chain–but doesn’t deny that there are economic issues with restructuring the economy.

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10/28 AM UPDATE: Like I said, “Bad and getting worse.”  This morning Will Hutton (author of The Writing on the Wall) and even the China Daily agree.

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I spoke with NPR again this week about the “feeling on the ground in southern China.”  And while I can’t speak for everyone, I know what I’m seeing across a large spectrum of industries and in a number of cities.

Basically, the euphoria is over.  Lack of any real press for the first 8 months of the year and no 3Q numbers until this last week meant that China thought it was immune from the global slow down.  Um, it’s time to wake up from the artificially induced “one world, one dream.”

What happened in the US with homes happened in southern China with export factories.  They mortgaged their future on the promise of continued growth and now it’s all gone and debts are higher than the value of inefficient factories and increasingly inexpensive labor.

With growth at 9% people are worried.  On the street that means a couple of things.  First spending will drop and conservative Chinese will save even more.  The domestic stock market scared millions of investors 9at least twice in the last decade now) and the US crash compounded that fear.  I don’t believe that the domestic economy is as impressive as the govt says.  It has never been the savior that MNC’s have dreamed and it’s not going to save the GDP this next year either.  People aren’t spending, they aren’t investing, the housing bubble is popping. The milk scandal has totally obscured any of the positives that the 0lympics created.  And it just keeps getting worse.

For more evidence look at housing prices in the east and now the 2nd and 3rd tier cities—they are all falling.  Look at investment rates in stocks (even in HK)—non existent. There is no domestic stock market to speak of anymore.  Our neighborhood shopping mall has 32 of it’s 110 store fronts EMPTY right now (33–new closure this AM!).  The mall two blocks away has more than 20+ of it’s 150 storefronts empty too.  And a third mall is being built next door?!!?

Second, the fact that the bottom dropped out of the 40% of the economy that was based on exports means that maybe up to 20% of the total economy is just gone now.  And it just will not be back next year either.  There is no way that the other 80% are going to remain untouched.  A few (or even a lot of) domestic infrastructure projects are not going to make up for that.

The buying slow down is going to kill the 4Q numbers too.  I have a friend in the technology business.  He told me of buyers that came over to finalize Christmas shipments of LCD TV’s for the US market.  They usually extract penalties and airfreight for the % of the Christmas orders that are late.  Not this year.  When the supplier said that 30% of the order would be late they told them to just keep it.  There is no market for it any more.

If I was a betting man, I’d put money on 4Q numbers being below 8.5% and next years numbers even lower.  (Honest numbers will be below 8.5% for sure but “official” numbers will not be that low because of the need to control a bit of the domestic collective psychology—like the US will never have another “great depression” because it sound’s so awful, 8.5% is the magic number that has to be hit just to keep the new entrants into the workforce employed in China.  A drop below 8.5% and people will start thinking ‘89 again.)

Third, like toys, many industries are now scared of being “Made in China” and will not come back (or will not come back as much as they were here before).   In the last year I’ve had three clients in the toy industry tell me that they’ll work with factories anywhere but China.  Even Chinese owned factories using Chinese materials in Cambodia, Lao, Indonesia or Burma are fine, said one guy.  Just so long that it doesn’t say “Made in China” on the tag.  This was happening before the slow down and so there were many factories that were compliments to the toy industry that were hurting and are now being pushed over the edge.

Most have seen the story of the Yantian port numbers and regardless of the cause, the export bonanza is officially over.

Fourth, this is exactly the “image” problem that people are writing about.

“China’s recurring scandals are clearly not stray incidents anymore, but systemic. This is in spite of China professing that it has adequate regulatory safeguards. The lack of transparency and suppression of information is increasingly becoming an issue. China needs to get its act together to improve safety norms, monitoring processes and surveillance. Prime Minister Wen Jiabao’s call to pay attention to “business ethics and social morality” is welcome. With China’s reputation as a reliable factory of the world at stake, and other competing countries offering quality and catching up with China, there is no guessing as to who the loser would be. This time around, an increasingly wary world is watching China carefully.”

Fifth, specific to GD province, the competition from 2-3rd tier cities hurts.  It started to show when 2 million migrant workers didn’t come back from Chinese New Year holiday this last year.  It’s continuing as people are realizing that being close to home may not only be as good as being on the east coast in terms of money per month, but also much safer as the economy slows down.  Sure the government wants to move another 100 million people to the cities in the next few years.  But “the cities” no longer mean Beijing, Tianjin, Shanghai, Shenzhen and Guangzhou.  “The cities” now means all the 2nd and 3rd tier cities more inland and closer to the rest of the teaming masses.

Sixth, combine that domestic competition with the fact that Guangdong province has decided to move up the economic food chain by raising labor rates and focusing grants and incentives on electronics and other higher end industries and you have a lot of factory closures here–”a lot,” by the way, means tens of thousands.

Finally, it’s going to get worse.  China hasn’t seen the worst of it and won’t until middle of next year at the soonest.  In the US, if the democrats get both the presidency and 60 seats in the Senate you will see both increased taxes in the US (e.g. less money in the economy to buy Chinese goods) and more protectionism for local industries (the left’s base has substantial union support).  I guess that we can hope that Obama will be as flaky as Clinton and campaign on one platform and then change immediately upon election and many protectionist policies will not be ultimately enacted.

Regardless of who wins, the US economy is not going to “recover” for at least 6 to 8 more quarters—and then who knows by how much or how quickly.  Most are saying ’09 is going to be worse and then we’ll see incremental growth starting summer ’10.  That means that if China’s domestic economy can’t pick up the slack (losing 20% of it’s economy) it’s going to a long couple of years for folks in the South.

The saving graces are the fact that China can still inject cash and still lower interest and tax rates to prop up the domestic economy.  Also the fall in the price of oil and other commodities will help to keep inflation down.  But if no one is buying anything out of fear of more turbulence these may not be enough to keep the Chinese economy above 8% next year.