Today’s China Daily has yet another article bemoaning China’s export performance.The article is titled “Growth of Exports in Steady Decline” and it starts out:
The growth of exports from China's labor-intensive industries is slowing, and the trend is set to continue, the Ministry of Commerce said Wednesday.In the first quarter of the year, the value of clothing exports rose 14.7 percent, less than the 17.6 percent growth reported for the same period of last year, the ministry said in a report. Similarly, the value of shoe exports rose 11.2 percent (compared with 16.7 percent last year) and toy exports grew 3.3 percent (down from 29.9 percent).
It is only at the bottom of the article that they point out that “the value of China's exports in the first three months grew 21.4 percent to $305.9 billion year on year. In contrast, the value of imports rose 28.6 percent to $264 billion in the first quarter.”This doesn’t strike me as a collapse in exports, but it does strike me that some exporters and their government allies are waging a very spirited campaign against further appreciation of the RMB.
Even if there is a slowdown in exports, it seems, at least for the time being, that domestic consumption may be taking up the slack.The Purchasing Manager’s Index in March rose to its highest level ever (although it was only started 28 months ago, so this might not be as big a deal as it seems).Most of the increase came from domestic customers, with export orders actually declining slightly for the first time in three months.This is exactly what we want to see – exports decline in importance and domestic demand increase in importance – but of course we shouldn’t get too excited about just one or two data points.We need to see this continue over the rest of the year before we can talk with confidence about a real rebalancing of the economy.
Today is a major holiday in China, as is tomorrow, so there is not a whole lot happening.My student Shang Ning tells me that there was an article in the current Caijing (probably China’s leading financial periodical) in which a senior SASAC (State-owned Assets Supervision and Administration Commission) official warned that because of the “uncertain macroeconomic environment”, large SOEs should “get ready for a two-year period of tightening.”The article claimed that this year is the first year since the SARS year of 2003 that we are expecting a decrease in SOE profits, led by the energy companies. His advice was that large Chinese companies should “control their debt levels and manage their budgets carefully.” A major concern he discussed was the weakness in operating cash flows.
I think this is very sound advice and gives an indication of how worried officials are about the next couple of years. I don’t have the numbers yet but my impression is that debt levels among large companies are very high and a large part of that debt is short term.Cashflow for many companies is weak, and of course any forced build-up of inventories caused by declining demand will put even more serious cashflow strains on companies. This, of course, is exactly the kind of balance sheet that seizes up during a contraction and forces companies into the type of self-preserving activities that are systemically bad.
That’s all for now.For any of my readers in Beijing, the only thing to add to this sleepy, slow day (it is very hot outside) is that today is the anniversary of D22, the music club I started two years ago. Since we have been credited with having been at the heart of the Beijing explosion in new and underground music, nearly everyone of the best bands in Beijing (and from elsewhere in China) have trooped to our doors, beginning two days ago and continuing on until Sunday, for celebratory performances. If you’re in Beijing I strongly recommend that you come tonight and Friday night, when we have some really great artists performing, but come early because we will probably be forced to close the doors at 10. These are going to be packed shows.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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December, 2007
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