Is China free from U.S. economic woes?

Scott Tong Apr 16, 2008

Is China free from U.S. economic woes?

Scott Tong Apr 16, 2008


TESS VIGELAND: Here’s one of those stories where expectations play a key role in perception. Today, China reported that its economy grew 10.6 percent in the first quarter — 10.6 percent! Normally you’d call that red hot, but the kicker here is that growth rate is down from 11.9 percent last year. Uh oh, so is China catching America’s subprime cold, or is it immune, “decoupled” from the US, as the pointy-head economists would say? It’s a big debate, with big implications for the global economy.

From Shanghai, Marketplace’s Scott Tong reports.

SCOTT TONG: To understand the decoupling debate, you need to know what powers the Chinese economy. Let’s walk around a neighborhood in western Shanghai to get an idea. Stop one — a microphone company. The firm Shuaiyin exports to American recording studios. To show off the product, these factory workers have been “volunteered.” “If you leave,” goes the song, “I will be lost,” which pretty much sums up the company’s situation. Founder Xu Gentang says in the second half of last year, his orders from American customers cratered by 40 percent.

XU GENTANG: My customers just said business is down, so late last year we had to layoff workers, and, since our orders are dropping, my employees make less overtime pay.

Many exporters are hurting, especially those relying on American sales, who haven’t diversified to say, Europe or the Middle East. To make things worse, costs for raw material and labor are way up.

CHIP CHAIKIN: You got a lot of people eating Rolaids or Tums who didn’t used to eat Rolaids or Tums, you know.

Chip Chaikin is with the private equity firm Blue Point Capital Partners. Suddenly, a lot of these guys who really have been able to grow 25, 30 percent a year by barely getting out of bed, now are suddenly seeing their businesses move backwards for the first time. Does this mean China’s in for a hard landing, that its business cycle is “coupled” to America’s? That’s the big question, and right now it’s a little too early to know. The pessimists say Chinese exports may fall off a cliff, creating rising unemployment and social instability.

CHAIKIN: If you’re an economy that’s geared to running at 11 percent growth a year, there’s people entering the work force and migrants moving into the cities, if your growth slows to 7 percent, which sounds fabulous by North American standards, it feels like you run into a wall at 50 miles an hour. It’s every bit as bad as us going from 4 percent to nothing.

If Chinese factories buy fewer raw materials, like oil and minerals and plastic, that hurts global trading partners and world commodity prices, but hold the pessimism, as we go up the street. At this shopping mall, chipper salespersons are hawking a new milk product. It may be the Chinese consumers themselves, “domestic demand,” that keeps this economy humming. Spending is up 10 percent a year, adjusted for inflation. Take Ms. Sun. She’s out here shopping for a fridge and a washer and a TV.

MS. SUN: I’ll probably buy a plasma TV, the thinner the better. Everyone does it, and it’s a pain to replace. My living room’s pretty big, so I’ll buy a 40-inch model.

Rising lifestyles and expectations fuel this consumption boom, as does the thirst for brand names in status-conscious urban China. Again, investor Chip Chaikin.

CHAIKIN: You know it hasn’t been that long ago since you stopped seeing the Armani label on the outside of the suits, you know, that people wouldn’t cut off. They would sort of leave the tag hanging on.

The last stop on our tour — a nearby construction site where a new high-rise is going up. Investment in what economists call “fixed assets” is the other leg of China’s economy, the building of roads, train tracks, factories and a whole lot of buildings, says Chaikin, a native of Ohio.

CHAIKIN: You hear the joke over and over gain that the national bird of China is the crane, and honestly, I can remember two, maybe three large buildings going up in Cleveland in my lifetime. You know, I look out my office window in Shanghai, I see probably 10.

And the thing about authoritarian Beijing is, whenever it wants it can snap its fingers and voila — infrastructure project: jobs, borrowing, economic activity, and this is the China optimists see, an economy much more than just the world’s factory. They argue it’s largely domestically driven and decoupled from North American woes.

In Shanghai, I’m Scott Tong for Marketplace.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.