Analysis of the Trends in the Industrial Economy in 2009
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Analysis of the trends in the industrial economy in 2009: Affected by the international financial crisis, the world economic recession will continue in 2009. The World Bank and the International Monetary Fund predict that the annual growth rate of global GDP (on a weighted average basis) will fall from 3.7% in 2007 to 2.6% in 2008, and to around 1% in 2009 – a decline that is much greater than that in 2008 – with recovery not occurring until 2010. The Organization for Economic Co-operation and Development released a report in November 2008, predicting that the real GDP of OECD countries would decline by 0.3% in 2009, with Japan’s economic growth rate at -0.1%, the United States at -0.9%, and Europe at -0.5%. Affected by the international macroeconomic environment, China’s industry maintained rapid growth in 2009, which made it quite challenging to keep the GDP growth rate above 8%. (1) Industrial growth will recover slowly after reaching a low point in the first half of the year. To address the impact of the international financial crisis on China’s economy, a series of measures have been introduced, including 10 actions aimed at expanding domestic demand and promoting economic growth; meanwhile, adjustment and revitalization plans are being formulated for 10 industries such as steel, automobiles, shipbuilding, petrochemicals, light industry, textiles, non-ferrous metals, equipment manufacturing, electronics, and dairy products. In the first half of 2009, as these policies, particularly those related to investment, are put into effect and inventory levels are reduced, industrial growth will stabilize and recover. Companies’ effort to clear out their remaining inventory was a key factor behind the sharp decline in industrial growth since September 2008. Since businesses also have the tendency to buy when prices are rising and avoid buying when they are falling, during periods of rapid increases in input prices, they tend to increase their inventory levels in order to mitigate the impact of rising costs; conversely, when input prices fall, they tend to reduce their inventory levels. With a sharp decline in PPI and difficulties in market sales, companies first need to clear their existing inventory, which leads to an excessive slowdown in industrial growth. As inventory levels are cleared in the first quarter of 2009, the industry will experience normal growth. **Approximately 1 trillion yuan of the 4 trillion yuan investment plan is expected to enter the implementation phase around the end of February 2009. Given the lagging effect of investment on economic growth, industrial growth rates may remain low in the first half of 2009 (especially in the first quarter), but they will gradually recover in the second half of the year. In fact, there are already some signs of recovery in our country’s industry. For example, the manufacturing purchasing managers’ index, which serves as an economic leading indicator, rose from 38.8 in November 2008 to 41.2 in December. However, it should also be noted that industrial growth is likely to find it difficult to recover rapidly in the short term. Based on historical experience, the duration of economic contraction periods in the U.S. since World War II has ranged from 8 to 16 months. As the worst economic recession since the Great Depression, this one will last longer. Therefore, our country’s industry may exhibit a “U-shaped” rather than a “V-shaped” trend, meaning that industrial growth may persist at its lowest level for 1 to 2 years before gradually entering the upward phase of the next growth cycle. However, it is difficult to expect industrial growth to return to the high levels seen in 2007. Firstly, export demand, which is an important driver of industrial growth, is not expected to see significant improvement in the short term. As the source of the crisis and one of our country’s main product exporters, the economic situation in the United States remains extremely severe. According to the U.S. Department of Labor, the unemployment rate in the United States reached 7.2% in December 2008, with 2.6 million new people losing their jobs that year – the highest figure since 1945. Sales within the United States continued to decline; in December 2008, wholesale sales in the U.S. dropped by 7.6%, with durable consumer goods seeing a 9.4% decline and non-durable consumer goods experiencing a 6.1% decline ； Inventory increased by 6.3%, with durable consumer goods rising by 1.63% and non-durable consumer goods rising by 0.78%. Second, a key cause of the subprime mortgage crisis was the excessive borrowing by American companies and households. The outbreak of the financial crisis led to the bankruptcy of numerous American financial institutions and a significant decline in financial assets, making it impossible for American companies and households to continue relying on borrowing to sustain their operations and lifestyles. However, the shift by Americans toward maintaining economic growth by reducing debt and increasing savings will take a long time to achieve. Moreover, the lessons learned from the financial crisis have led the United States to avoid continuing its lifestyle of relying on heavy borrowing for consumption; as a result, the pace of growth in U.S. imports will decline. This means that the international market will find it difficult to absorb China’s virtually unlimited supply of products, and export demand will play a smaller role in driving China’s economy. At the same time, due to factors such as the urban-rural dual structure, widening income disparities, and an imperfect social security system, it is difficult for Chinese residents’ consumption expenditure to increase significantly in the short term; likewise, investment driven by expenditure is also unlikely to experience sustained rapid growth. Therefore, the growth rate of China’s industry in the future will be lower than that during the previous economic upturn. (II) Export-oriented industries face a severe situation. In recent years, China’s economic growth has relied heavily on exports; the share of the trade surplus in GDP has risen from 2% at the beginning of this century to over 8%, while exports account for nearly 40% of GDP. From 2005 to 2007, exports contributed around 20% to GDP growth. The main destinations for China’s exports are developed countries such as the United States, Europe, and Japan. In 2007, exports to seven such countries – the United States, Japan, Germany, the Netherlands, the United Kingdom, Italy, and France – accounted for 40.9% of China’s total export volume. According to the World Bank’s projections, global real import trade growth will decline from 7.4% in 2007 to 5.8% in 2008, with a negative growth rate occurring in 2009 for the first time since 1982. This indicates that global trade will experience a decline for the first time in 27 years, and the growth rate of imports in developed countries is set to drop even more significantly. Affected by the global economic recession, global trade will also decline significantly. The Baltic Dry Index (BDI), which reflects the health of the shipping market, fell below 1,000 on October 28, 2008, closing at 982 points – a 91.7% drop from its peak of 11,793 points in May. On December 4, the BDI index fell further to 666 points, hitting a new low since 2001 (after which it rebounded slightly to 770 points by the end of December), reflecting the severe impact of the international financial crisis on international trade. Since our country’s export markets are mainly in developed countries, and it is these developed countries that have experienced the most severe economic downturns, our country’s commodity exports will face a very challenging situation in 2009. Although our country has successively raised export tax rebate rates in recent months, it is difficult to reverse the overall decline in exports. In 2008, China’s foreign trade exports grew by 17.2%, a slowdown of 8.5 percentage points compared with the same period the previous year. An official from the Ministry of Commerce noted that, taking into account factors such as the appreciation of the RMB and the sharp rise in international raw material prices, exports in 2008 actually experienced negative growth. In January 2007, the average exchange rate of the US dollar against the RMB was 1 US dollar to 7.5012 RMB, while by December 2008 the RMB appreciated to 1 US dollar to 6.8424 RMB, representing an appreciation of about 14% for the RMB. If the factor of the RMB’s appreciation is taken into account, the growth in export volume in 2008 will drop below 10%. In November 2008, China’s export order index dropped from 59.10 in March to 29.00 (it rose slightly to 30.70 in December). In terms of trade methods, the growth rate of exports under processing trade declined significantly. In the first 11 months of 2008, exports under processing trade grew by 11.9%, a decrease of 9.3 percentage points, while exports under regular trade grew by 24.7%, a decrease of 5.5 percentage points. It is evident that, affected by declining external demand and difficulties in exports, China’s export-oriented industries such as textiles and clothing, electronics, and automobiles will face a very severe situation. (III) The growth rate of the heavy and chemical industries is set to see a significant rebound. Looking at the internal structure of industry, it is the heavy and chemical sectors that are currently experiencing the fastest decline in growth rates in China. In order to boost domestic demand and ensure rapid economic growth, a \"growth protection\" plan was formulated to invest 4 trillion yuan by the end of 2010. The specific areas for investment include: 280 billion yuan for affordable housing projects; approximately 370 billion yuan for rural livelihood projects and rural infrastructure; 1.8 trillion yuan for the construction of infrastructure such as railways, roads, airports, and urban and rural power grids; 40 billion yuan for healthcare and cultural education services; 350 billion yuan for environmental protection efforts; 160 billion yuan for independent innovation and structural adjustment; and 1 trillion yuan for post-disaster recovery and reconstruction. Of the 100 billion yuan in investments to be made by the end of 2008, the funds have been allocated as follows: 10 billion yuan for affordable housing projects, 34 billion yuan for rural livelihood projects and rural infrastructure, 25 billion yuan for the construction of major infrastructure such as railways, roads, and airports, 13 billion yuan for the development of social sectors such as healthcare, education, and culture, 12 billion yuan for energy conservation, emission reduction, and ecological protection projects, and 6 billion yuan for independent innovation and industrial structure adjustment. According to officials from the **National Development and Reform Commission**, total investment across the economy will exceed 17 trillion in 2008, and it will reach 20 trillion in 2009. The industries most driven by the construction sector include metal smelting and rolling, the chemical industry, non-metallic mineral products manufacturing, general and special equipment manufacturing, and metal products manufacturing – all of which fall under the heavy and chemical industry category. Therefore, the **4 trillion yuan investment plan focused on infrastructure development can boost the growth of heavy and chemical industries, which are sectors experiencing the fastest decline in growth rates, including the construction industry and its upstream industries, thereby maximizing the economic stimulus effect.
(IV) Slowing growth in the consumer goods industry: In recent years, consumption growth in China has remained relatively stable. In 2008, the monthly growth rate of the total retail sales of consumer goods in our country remained above 20% (except for February, which was affected by the Spring Festival). However, looking at the trends, as the share of labor income in China’s GDP has been on a downward trend over the past decade, coupled with inadequate provisions for pensions, healthcare, and housing security, consumers are reluctant to spend, which has resulted in relatively weak growth in consumption in China. At the same time, the wealth reduction effect resulting from the sharp decline in the domestic stock market, along with the rise in unemployment caused by business closures, will further suppress consumer growth. Furthermore, the real estate market has been sluggish since 2008; many potential homebuyers have waited on the sidelines with their money, resulting in a sharp decline in real estate sales. Although the series of measures taken to stimulate real estate sales, increase the supply of affordable housing, support farmers in boosting their incomes, and provide more subsidies will, to some extent, offset the aforementioned negative effects, their impact on driving consumer growth is relatively limited. Due to the significant impact on exports, a large number of export-oriented enterprises will intensify their efforts to explore the domestic market. The increased competition makes it inevitable for prices of products in the domestic market to fall. At the same time, since it is difficult for domestic demand to increase significantly in the short term, consumer goods industries that rely heavily on exports, such as textiles and apparel serta consumer electronics, will face considerable difficulties in selling their products. This will lead to underutilization of production capacity, with a high likelihood of a slowdown in their growth rates. A consequence of the slowing growth in industries such as textiles and apparel, as well as consumer electronics, is a significant rise in unemployment rates. The industrial sectors that create the most jobs per unit of output are, in order: the manufacturing of educational, cultural, and sports goods; the manufacturing of textiles, clothing, shoes, and hats; the manufacturing of leather, fur, feathers (down), and related products; the manufacturing of handicrafts and other goods; the furniture manufacturing industry; and the textile industry. The employment-generation capacity of these sectors is nearly twice or even higher than the average level for all industries above a certain scale. Even the manufacturing of communication equipment, computers, and other electronic devices, as well as the manufacturing of instruments and machinery for cultural and office use, has an employment-generation capacity that exceeds the average level of industries above that scale. From this perspective, **policies aimed at increasing the scale of fixed asset investment are likely to have little impact on curbing rising unemployment rates. (5) CPI and PPI continue to decline. Since the second half of 2008, both the consumer price index and the industrial product export price index have shown a downward trend. The \"inverted scissors gap\" between CPI and PPI, as well as between PPI and the purchase prices of raw materials, fuel, and power, has begun to narrow, indicating that inflationary pressures have subsided. Although the prices of industrially manufactured goods may fall due to the shift from exports to domestic sales, the impact of the global economic recession will cause raw material prices to drop even faster. For example, international crude oil prices have fallen from a peak of nearly $150 per barrel to below $40 per barrel; coal prices have also dropped by about 60%, while agricultural product prices have returned to levels prior to the bull market that began in 2008. The prices of metals such as copper, aluminum, and steel have also declined significantly. The World Bank predicts that in 2009, international prices for raw materials will fall significantly, which will help reduce cost pressures on China’s industrial production sector and increase profit margins for the manufacturing industry. On the other hand, as the rapid rise in mining and raw material prices during the previous period drove growth in industries such as steel, metallurgy, and building materials, a decline in market demand and falling prices will slow down the growth rate of these industries. (VI) Resurgence of overcapacity: During the period of high economic growth from 2003 to 2007, China’s economy experienced strong demand for both production and sales; it was easy for companies to make profits, as there was no shortage of markets for their products. The prices of production inputs, especially raw materials, rose rapidly, and the issue of overcapacity was not significant at that time. In the steel industry, for example, policies were introduced as early as 2003 to curb reckless investment due to overcapacity. Steel production exceeded 100 million tons in 1998, 200 million tons in 2003, 300 million tons in 2004, and 400 million tons in 2006. However, sales performed well, and the production and sales ratio in the black metal smelting and rolling industry remained at a high level; except for 2004, it exceeded the average industrial production and sales ratio in every year since 1998. During the previous economic upturn, China’s GDP growth rate remained above 10%, while the growth rate of fixed asset investment across the economy was above 20% (ranging from 23.9% to 27.7%), which is more than twice the GDP growth rate. Meanwhile, even when calculated at current prices, the growth rate of final consumption expenditure was only around 10% during that period, with the highest figure being 16% in 2007. The growth in fixed asset investment implies that new production capacity is continuously brought into the market. The gap of over 10% between the growth rate of fixed asset investment and the growth rates of GDP and final consumption indicates that most of the newly released capacity is absorbed by exports. At current prices, between 2002 and 2007, the average annual growth rates for final consumption, capital formation, and net exports were 12.4%, 19.6%, and 49.9% respectively. With the sharp decline in export demand, overcapacity in many industries will reappear. To boost domestic demand, an investment plan of 4 trillion yuan was proposed; some projects that could not be approved or had their approvals delayed in the past were rushed into implementation. If not guided properly, this will inevitably further exacerbate overcapacity in certain industries. Based on the analysis of these various aspects, we believe that industrial growth in 2009 will be driven primarily by investment. The World Bank’s Quarterly Report on the Chinese Economy, released in November 2008, also predicted that China’s GDP growth rate in 2009 would be around 7.5%, with more than half of that growth coming from **dominant expenditures. In the industrial sector, heavy and chemical industries, which are related to capital investment, will be able to maintain rapid growth, while the consumer goods industry, especially those focused on exports, will face significant difficulties. A slowdown in export growth will cause problems of overcapacity to reemerge in certain industries.