Commentary on Political Economy

Sunday, 12 July 2020

China to the economic rescue? Don’t count on it

Basil Lenzo, of the Geraldton Fishermen’s Co-Operative, says it could take up to 12 months for exports to China to recover from the coronavirus downturn. Picture: MARIE NIRME
Basil Lenzo, of the Geraldton Fishermen’s Co-Operative, says it could take up to 12 months for exports to China to recover from the coronavirus downturn. Picture: MARIE NIRME
  • ByEun-Young Jeong andTom Fairless
  • 1 minute ago 
Getting the global economy back on its feet this year won’t be easy. But it will be even tougher without more help from China, the locomotive that powered recoveries from the world’s last economic emergency.
During the 2008-09 financial crisis, China’s soaring demand for raw materials and other goods boosted growth across the world, underpinning rebounds in places like Brazil and Germany. Some countries, like Australia, avoided recession almost entirely thanks to trade with China.
China isn’t poised to help as much this time. Despite signs of a solid rebound recently, its economy has been hit much harder than in 2008-09, limiting its ability to lift other nations from recession prompted by the coronavirus pandemic.

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China is showing more restraint on stimulus spending compared with past downturns. It is also more self-sufficient in some industries than previously, meaning it may need to buy less from abroad.
Thomas Nuernberger, Greater China chief executive of ebm-papst Group, a fan and motor manufacturer based in southern Germany, says demand from Chinese hospitals and data centres has recovered. But sales have fallen sharply to the auto industry and to Chinese manufacturers that ship their products elsewhere. He expects caution among Chinese consumers and businesses to weigh on growth, reducing odds of a “V-shaped” recovery.
“For 2020 it is not possible, I think, that China does the job” it did in 2008-09, said Thilo Brodtmann, executive director of the German Mechanical Engineering Industry Association, a trade body. “Quite a few companies in China are struggling.”
China is still expected to post the strongest growth of any major economy this year. The International Monetary Fund projects that China’s gross domestic product will expand 1 per cent in 2020. This follows a 6.8 per cent contraction in the first quarter. The US, Germany and Japan are expected to contract more than 5 per cent this year.
Any growth in China’s economy -- the world’s second-largest -- can make a big difference. China’s purchases of soybeans are helping American farmers, even if they don’t fully add up to totals promised in the US-China trade deal. In Ireland, pork exports to China jumped 80 per cent in the first four months this year compared with the same period in 2019 as China dealt with a swine fever outbreak.
Still, on balance, economists say China’s demand isn’t providing as much oomph as it did during the last recession. Some countries have been hit so hard that even solid Chinese demand can’t get them out of trouble.
In 2008, Beijing rolled out a $US586 billion stimulus package worth about 13 per cent of the country’s economic output at the time. That was followed by a boom in lending. China’s economy grew 9.7 per cent in 2008 and 9.4 per cent 2009.
Much of its spending went into infrastructure like roads, airports and housing, driving Chinese demand for imported materials like iron ore. Australia, a major beneficiary, saw its economy expand by 3.7 per cent in 2008 and 1.9 per cent in 2009.
This year, annual iron-ore supply contracts with Chinese customers are running ahead of levels at the same stage of 2019, according to a senior Australian mining executive. Some of that reflects demand shifted to Australia from Brazil, another big iron-ore player that has been hit harder by the coronavirus.
Yet that isn’t the kind of demand surge that Australia, which saw a sharp drop in consumer spending, needs to avoid slipping into its first recession in nearly three decades, with annual GDP contracting 4 per cent or more, according to some forecasts.
Australian iron ore is unloaded at a port in China. Picture: Reuters
Australian iron ore is unloaded at a port in China. Picture: Reuters
Uncertainty over fresh COVID-19 outbreaks is further clouding the outlook.
Geraldton Fishermen’s Co-operative, which exports 90 per cent of its rock lobster catch from Western Australia to China, saw export volumes to China return to historical averages in April and May after a month-long pause in fishing, said Matt Rutter, its chief executive.
But demand from China fluttered again in June, when new coronavirus cases connected to Beijing’s largest food wholesale market surfaced.
“It could take six to 12 months or more for the market to recover,” said Mr Rutter.
The picture is similar in Thailand, whose economy relies heavily on China. Chinese demand helped stabilise prices for rubber, a major Thai export. Raweeploy Yutthacharoenkit, manager of Bothong Rubber Fund Cooperative, says some Chinese companies are expanding and it has been hard to keep up, especially since Thai rubber farmers cut production because of COVID-19.
Thailand’s economy is still expected to shrink as much as 8 per cent this year, though, in part because Chinese tourists are largely staying away.
In South Korea, semiconductor-equipment maker YoungjinIND has resumed production thanks to orders from chip-making facilities in China. Orders from China dropped to zero in February and March.
But the orders are still only a third of last year’s, says Park Jong-jin, head of YoungjinIND’s planning team.
Concerns over rising debt have made Beijing warier of engineering more growth through stimulus this year. Its fiscal measures are estimated to amount to 4.6 per cent of GDP, according to the IMF. Christine Wong, a visiting research professor at the National University of Singapore’s East Asian Institute, figures it may add up to 7 per cent of GDP when all government budgets are taken into account.
In some cases, though, China is better-placed to supply its needs than before. In the construction sector, sales of excavators jumped 68 per cent from the previous year in May, according to the China Construction Machinery Association.
But this jump was driven by a 76 per cent increase in sales by domestic producers, which include Sany Heavy Industry. Purchases from foreign sources, which include Caterpillar and Komatsu in Japan, rose just 3 per cent, according to Goldman Sachs.
Somchai Techapanichkul, chairman of the Thai Plastic Industry Association, says his members have seen a similar trend.
“China has developed their own plastic, and the price is cheaper,” he said. “They may not want our products anymore.”
China’s longer-term shift toward more reliance on services instead of manufacturing has further curbed demand for the specialised machinery and equipment that helped turn China into the world’s factory floor, says Joerg Kraemer, chief economist at Commerzbank in Frankfurt.
Consumer spending has helped create new demand in some industries, while others have been left out.
Germany’s premium-auto manufacturers recently highlighted a strong rebound in Chinese sales after auto factories and dealerships reopened there in March. BMW recently reported a 17 per cent year-over-year increase in sales of its BMW and Mini brand vehicles in China in the second quarter, partly compensating for a sharp decline in the first quarter.
But overall, China’s passenger-car market is likely to shrink by 10 per cent this year compared with 2019, according to a July 3 report by the German Association of the Automotive Industry. Germany’s large auto suppliers have recently announced tens of thousands of job cuts.
A deterioration in the broader trade environment between western countries like Germany and China has further complicated matters, said Lars Feld, chairman of the Council of Economic Experts that advises Germany’s government. Mr Feld points to increased barriers to Chinese investment in Germany, a response to perceived Chinese protectionism.
“China is generally not a growth machine at the moment,” said Wolfram Eberhardt, a spokesman for Claas KGaA mbH, a large agricultural-machinery manufacturer in northwest Germany. Industry officials complain the global agricultural-machinery sector is being weighed down by weak Chinese demand and unfair competition.
Mark Zandi, chief economist at Moody’s Analytics, says that it is now the US that may be in a better position to lead the global economy out of recession. Washington’s fiscal-policy response to COVID-19 amounts to 13 per cent of GDP this year, according to Mr Zandi.
However, the U.S. and some other developed economies have rising coronavirus cases, threatening their ability to lead a global recovery. That leaves many companies counting on China.
“China will still be a growth engine for the world,” said Ms Wong at the National University of Singapore. But “if China grows at 1 per cent, it’s barely inching forward. So it’s not going to be pulling anybody very fast.”
Wall Street Journal

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