The beginnings of a disintegrating China - Part I

The Olympics have come and gone, and the promises by Ministry of Finance government spokesmen, that the Chinese economy was set to grow healthily and steadily after the summer Olympic Games and that a post-Olympic economic downturn was highly unlikely, need to rethink their official statements. Even today after the $500 billion rescue package from the Chinese government the National Bureau of Statistics (NBS) reiterated: “China's economy is in good shape despite the changing economic environment, and it will remain stable with relatively fast growth. We should be confident about the country's economic outlook."

Rosy scenarios now fly around the daily news that even in the worst of global economic times China will be minimally affected. The fundamentals of China's economy are sound, the central government is in total control and if a problem occurs, the solution is already unfolding. The National Development and Reform Commission will continue efforts to expand domestic consumption amid the global economic uncertainty and People's Bank of China says “there is still room to tap more domestic consumption”.

The Ministry of Finance reiterated that “A high savings ratio can stimulate demand when economic recession occurs. China's economy is therefore cushioned against the worst of the disaster.”

With all of this positive news, who should be worried? My answer: anyone that understands the ripple effect, that’s who! The leaders say one thing to pacify the people while on the streets another world exists. I want to delve into the beginnings of a disintegrating China.

I sat in disbelief reading a recent Shenzhen local paper stating that “Some 9,000 of the 45,000 factories in the cities of Guangzhou, Dongguan and Shenzhen are expected to close down in the next three months according to the Dongguan City Association of Enterprises with Foreign Investment estimates. Those closures would see up to 2.7 million jobs cut as overseas demand for consumer goods and clothes fades.” That’s more than 50,000 a day if you believe official figures, which I do not, and I believe the number is actually higher.

The association says that, by end of January, demand will shrink by 30 per cent, and these are just mainland factories. The Federation of Hong Kong Industries said that about 25 per cent of the 70,000 Hong Kong-owned companies in southern China "could go to the wall by the end of January". Yet on the very next page I read an article quoting the Ministry of Commerce as stating, “Although it is likely to cause a decline in China's external demand, our stock market and financial system will not be fundamentally affected”.

I can understand the flip-flopping stories as a means to keep a population from panicking; after all the Shanghai A-shares have declined more than 60 per cent from their bubbly peak at the beginning of the year. The Hang Sang in Hong Kong and the Shenzhen indices are not doing much better. Real estate prices have slipped 20 per cent in the last six months, all of the recent factory closings with many more to come and this is just the beginning of a prolonged feedback loop.

The central government's plan to reverse a foreign trade decline is to increase domestic consumption, restructure industry and boost innovation to change its economic development mode; that’s fine but first you need to have an expanding domestic economy to do that.

Priority number one

Number one on the priority list is domestic unrest caused by factory closures and owners declaring bankruptcy, thereby avoiding the troublesome task of paying their employees. In the last three weeks Dongguan Weixu Shoe Company collapsed and laid off 2,000, Chong Yik Toy Company shut leaving 1,000 without pay. The largest, Smart Union, locked its gates on 7,600 workers. Protesters descended on government buildings in Dongguan where hundreds of police were called out to quell violence.

Local public funds have been used to cover the back pay owed to workers, $7.6 million so far. This was to cover three factory closures. Imagine the bill when factories close across China in the tens of thousands. By the time you read the article “Govt foots collapsed shoe firm's wage bill”, from Xinhua News Agency many more factories will have closed along the east coast.

“Big deal”, you say. “The workers are paid and will return to the countryside where they can grow vegetables.” That is true, but the few thousand RMB in their pockets will run out after a few months and with very few other opportunities to secure an income, China’s stability is in question. These workers originally came to the city to support the family by sending back money every month, now they are returning to the countryside by the tens of millions across China. My question is, "When the money runs out what will they do?" I’m sure crime and violence will skyrocket - to what degree I can only guess - but most importantly to what degree can security be guaranteed by the central authorities outside the cities?

If there is a repeat of anything like the Great Leap Forward, where 40 million starved to death, or the Cultural Revolution, which ended barely two decades ago, it will become a society restructuring event. China today is quite a different place compared to the 1950s: the current pollution problems have made 98 per cent of water sources above ground unusable and the amount of arable land has shrunk dramatically as factories and cities now cover what was once farmland.