Sorry, it's not only as bad as the news is saying...it's worse.

I know that I was complaining that Obama was predicting world destruction and had no hope the other day.  And I don't want to add to the doom and gloom crowd.  But that doesn't mean that people should be seeing silver linings where there really aren't any either.According to some, I won't mention any names, since the CBD’s of most of China’s large east coast cities are still humming along with traffic, full coffee shops and English classes the economy is not really so bad after all.  US news rags are actually saying "China got it right."  Individual parrots are saying “My English classes are cram full—so it can’t be that bad.”  Or “Downtown _______ is still full of people, traffic, etc.; I don’t see any down turn!”I think that this overly-optimistic reading of the tea leaves is both short-sighted and naïve.I’ll be honest, if I was only doing business in the Shenzhen CBD—only teaching English or going to Starbucks or even working in a large office building I’d probably agree—"Hey, it doesn’t look that bad at street level.  I mean, lay-offs here are minimal and I still see about the same number of people eating lunch every day." I’ve even commented before that over CNY and even before, the shopping malls are indeed relatively full of shoppers.  But it’s quite a leap to conclude that because Starbucks is still in business the entire Chinese economy is still moving right along.Here’s my two cents.First some context.  I’ve been in at least 15 different factories in the last 45 days, my QC in another 20+.  Different industries, different cities, different target markets.  Regardless of the factory location or industry, we’re all seeing and being told the same thing—no one is running anywhere near 50% capacity.  Even the smart factories that spent last year buying up closing competitors’ equipment are hurting for orders.  Electronics are dead.  Toys and furniture are going or already gone.  Garments and textiles have slowed down significantly.Factory managers and sales people that are still around are openly worried they won’t be able to pay for the cars or apartments or their kids’ schools that they committed to back in ’07 or early ’08.Every factory rep, to a man, has told me the same thing this year, basically: “well, it’s not good, but I’m still here.”  (You know it’s bad when face-conscious Chinese are telling you they’re having a hard time.)  Now this isn’t empirical and it’s not even real numbers, but it is the real situation for more varied types of industries than is a quick survey of shopping malls. (for numbers see this post by The Financial Times or this commentary by China Economics Blog.

Side note: The FT article above makes a small but very important point that I think that almost EVERYONE is missing in the discussions on China—it’s just not that big, relatively speaking.  (At least not yet.)  The US economy is HUGE—so huge that with all the trillions of dollars of loss in the last year it’s still the largest economy in the world and more than double number 2—and, no number 2 is NOT China (it’s Japan).  China’s economy, with 1.3 billion people, is roughly the size of Germany’s who has just over 80 million people!  The amount of poverty in China is both a drag and a hook—its 200 million people living on USD$1 a day or less means that it’s still a very poor country.  But the annual growth numbers and the (now 300 million strong) middle and upper classes have been inspiring the dreams of entrepreneurs for more than a century.  What China really has is an economic paradox that both sides of the “China will save the world” debate use to support their positions.  For example: State planned capitalism; A combination of huge cash reserves and corrupt banks; Massive industrial potential and thousands of bankrupt state enterprises; millions of people saving 30% of their income and tight limits on the flow of investment cash out of the country.  A society that likes conspicuous consumption but hates spending money. Tons of labor but very low levels of education for most people once you get past management.  Cheap labor but rising costs of living.

So just in case you still believe that it’s not so bad here, let me tell you.  It is. (Rude email preempt:  No, I do not get any joy in this—I live here.  My in-laws and friends are here.  My employees and their families are all here.)  Anyway, here’s the reasons for my take:The cities are not a most accurate judge for the economy for a number of reasons.  For one, the lack of funds keeps people home, in this case Chinese people didn’t go home for CNY en masse like they usually do.  They save the money and spend it locally instead.  So cities look like there is little change—that would explain the slight % bump in retail sales in Jan too.Besides, CNY always skews things.  This one holiday can be 40% of some retail shops annual income.The return of CNY also marks the new enrollment period for many night schools.  People are either not making as much and/or not working as many hour as they were last year so English or accounting classes are way to fill up evening hours and get a leg up.  Remember Chinese people save money—they typically have cash on hand they can use for this type of thing.The fact that there are still 10 million people or more in every big city says nothing about the economy.  These people still have homes, kids in school, commitments, (lower) paying jobs, etc., just like they did 6 and 12 months ago.  The migrant workers (that you didn’t see on the streets anyway) are the ones that have gone home and stayed home.  Not the middle class apartment owners.Cars are not the economy.  Yes there was a flurry of new car sales in January.  There is every CNY.  And, remember housing sales going up in LA last quarter of last year?  Yup, just like everywhere else, Chinese people know a good deal when they see one.  That doesn’t mean the economy is improving, as the CA govt will attest to.  Chinese people have cash savings, the Chinese car market is significantly over supplied due to last year’s downturn, there are multiple government and industry incentives to buy now, and there is almost completely free credit available to people with assets.  (Can you see this leading to a repeat of ’98? Me too.)  Finally, I’m willing to bet that because of CNY January’s numbers will be an anomaly (never underestimate the power of face).Stats are lies.  Remember, China ranks next to Myanmar and North Korea in terms of transparency.  As I’ve said before here, the social implications of the presented (as opposed to actual) numbers are at least as important as the actual numbers themselves.  This is historically true in China specifically and in socialist countries in general.  The numbers are worse than reported, guaranteed.

Side Note: A stats example.  The recent stat that Guangdong province actually had a net gain in new business registrations over the last year (+38K businesses) doesn’t explain why there are lay-offs to the tune of tens of millions of more workers than the govt expected over the same period.  What’s the answer?  No, it's not a robust economy.  I’m guessing it's an increase in companies set up tax shelters (fake companies), unemployed individuals setting up their own trading companies and factories changing their company registrations/names to avoid debt payments and collections.

Out in the countryside it’s not any better either.  There are a lot of workers (tens of millions) that went home and are still home—they don’t have any place to go back to.  There’s no work—and they are going to start protesting if they don’t have anything in in the next 6 months.  12 months ago factories in Guangdong province couldn’t pay people enough to stay and work.  Now, there are lines for every single job.  There are groups of (laid off) workers waiting at the gates of most industrial parks.  There are fights to be first in line when a factory posts a new “help wanted” posters.  Workers that had their pick of jobs and options last year are taking just about whatever they can find now.Internationally China is the tail, not the dog.  The domestic economy has not become the world’s savior as had been hopped.  China is still export dependent and export markets rebound AFTER the other import economies recover, not before.  That means that there must be a significant and sustained up-swing in international orders before the Chinese economy shows signs of recovery.Further, as I’ve said before, China’s domestic economy is NOT big enough to suck up the exports or the jobs supporting the exports that are now disappeared.  China is also no longer importing consumer goods or parts for export from other Asian neighbors either.  As demand in the final export markets drop so does the trade with China it’s neighbors—worsening the situation rather than helping anyone.  And the conclusion of some is that China is going to get worse before it gets better.There may indeed be pockets of growth, of good fortune and of positive economic news, but China in general and Guangdong in particular are not those places.  I don’t want to be a wet blanket, but I’d rather be surprised with better than expected options/numbers than be crushed by unexpected bad news.