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Subject: The Rudd strategy Part II: just how good is China's economy?
Zhang Fei    11/5/2008 8:50:35 PM
(Quote) Australia's reliance on China's economy Despite a lack of clear evidence that the global economic crisis will not worsen, the Rudd Government is confident that China's ongoing demand will continue to drive our resources sector, contributing to state and federal coffers and offset any downturn. Is Rudd relying on China's US$1.9 trillion foreign currency reserve substantially insulating it from the global crisis? China in the global economy China is a huge assembly plant, importing components, energy and raw materials to produce goods for export, reliant on high volumes and low margins. While it earns trillions in foreign exchange, re-exportable content is in the high billions. China distorts the "level playing field" in world trade with a range of subsidies including those paid to state-owned petroleum refineries forced to sell petrol, diesel and refined petroleum products well below cost. In 2008, Sinopec received billions of dollars to protect its bottom line. Subsidies paid to PetroChem were not disclosed. Private refiners received no subsidies and shut down operations to avoid losses. Many state-owned enterprises operate at a loss just to earn foreign exchange and provide employment, losses concealed by off balance sheet accounting. 2009 growth estimates Pre crisis, China accounted for about 5 per cent of total world GDP. The USA accounted for 28 per cent. China also accounts for roughly 12 per cent of global manufacturing. Domestic demand however, accounts for just 43 per cent of China's GDP. America and Europe consume more than 40 per cent of China's exports. China's 2008 third quarter GDP growth slipped to 9 per cent on the back of successive monthly declines, the lowest since 2003. China's export growth rate is estimated to plummet from 21 per cent in 2008 to a low of 10 per cent in 2009. Factory closures Guandong is the major centre for export manufacturers which employ about 10 million. In the first seven months of 2008, safety standards non-compliance closed over 50 per cent of China's toy exporting factories. New credits restrictions are severely impacting on the supply chain. Exporter's who once received payment ex-factory, are now giving 90 days credit and warehousing surplus stock. Closures range from global brands to component manufacturers: 18,000 of the 70,000 Hong Kong owned factories will close following deliveries for Christmas and Chinese New Year orders. Some will close earlier. An initial 2.7 million jobs are estimated to disappear. Demonstrations by sacked workers demanding unpaid wages are increasing. Mining and heavy industry are also suffering The shut down of heavy industry and power generation to reduce pollution during the Beijing 2008 Olympics is blamed for the steel industry slowdown. The real causes however were evident in June 2008. Steel China produces 40 per cent of the world's steel. Construction, household appliances and the car industry are China's major domestic steel consumers. The property sector alone consumed 38 per cent of that demand. Restructuring the steel industry, improved efficiencies, fierce competition between the new giants and steadily declining demand resulted in oversupply and plummeting steel prices. Since June 2008, ore stockpiles were increasing at terminals and steel mills. Suppliers were asked to delay shipments. Brazil shipments have almost ceased. By mid September domestic steel prices had dropped by 37 per cent and spot prices dropped 44 per cent. Major steel mills in the north, central and south are cutting production. One Hebei group cut production by 20 million tonnes, (35 million tonnes iron ore equivalent). A further 20 per cent cut is forecast November/December. Another Hebei mill shut the furnaces and sent workers home. Facing operating losses of US$150 per tonne, commissioning of the new hi-tech Caofeidian steel mill is delayed indefinitely. Coal mining Like steel, China's coal industry is also undergoing major restructuring. Thousands of smaller mines are closing adding to unemployment. New huge mechanised open cut steaming and coking coal mines are opening in Inner Mongolia and Mongolia. Dedicated heavy duty railways connect the mines to major industrial and power generating bases in China reducing transport bottlenecks caused by the endless convoys of trucks and trains from the smaller mines, forcing more closures and layoffs. What is China's consumer economy China's 1.3 billion population is considered a massive untapped consumer market. The reality however, is different. Eight hundred million of the 1.3 billion "consumers" are categorised as rural peasants. Add to that the hundreds of millions of low paid urban workers and unregistered individuals. China also has the world's largest rapidly growing aged population. There is also China's rapidly widening rural-urban wealth gap. About 600 million Chinese live on less that US$2 per day. Nationa
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