China Field Visit 1 – An Overview

I was at Kwang-tung province, China and visited more than 15 factories and entertainment centres. One common message that I gathered is that the worst is over and business orders are picking up. Prices of hotels, foods and entertainments are rising – largely attributable to government spending.

Focus has largely shifted to local markets. Exports in April down 22.6% compared to -17.1% in the month before, so the expected inventory shift isn’t lifting China yet. However, fixed asset investment (FAI) is super-strong. A friend of mine in Zhong-san told me that he is super-bullish and is preparing for its seventh factory opening in the next couple of months. FAI of 30.5% year-to-date is actually 34% in April – the strongest since early 2004. This is decoupling: exports collapse but domestic demand actually accelerates on the back of strong government spending and more than 30% rise in loan growth.

My conversation with some retailers, however, reveals that retail sales are growing fast, but top-line growth has been at the expense of margins – bottom-line growth for retailers can be a very different story. It is no surprise to me when I reading local papers. In one conversation with a local graduate, I was told that finding job for new entrants like him is tough and there are too many people. Yu Yondding of the China Academy of Social Sciences says the Chinese economy must grow between 8 to 9% annually to absorb the 24 million new workers who enter the labor force each year. Of the 5.5 million university graduates this year, 800,000 have yet to find work, according to Xinhua, the state news service. The labor market in China is getting increasingly competitive, with more job hunters than vacancies.

Beijing takes next step in boosting domestic spending. The plan to allow non-deposit taking companies with at least $12bn in asset to issue consumer loans moves a step closer to implementation. With other on-going reforms in the banking sector and the relatively low penetration rate of China’s consumer credit business, I think the economic and commercial potential for this channel of credit expansion is huge.