Parkson Retail Group Ltd., the Beijing-based department store chain, fell the most in a year on the Hong Kong stock exchange as China sales growth slowed.

The group yesterday said fourth-quarter growth in Chinese stores open at least 12 months cooled to between 7 percent and 8 percent, compared with a 12 percent rise for the year. Parkson cited the slowing trading environment in China, where it runs 40 stores. Recessions around the globe are cutting demand for Chinese products, prompting job cuts and factory closures.

“The result is a lot worse than expected,” Keith Li, a retail analyst at CIMB-GK Securities (HK) Ltd., said by phone from Hong Kong. “We will see growth momentum slow down for more retailers in China.”

This is a conspiracy video that agitates against the Federal Reserve. Hocus pocus, not helpful at all.

The World Bank recently released a quarterly review on China, http://siteresources.worldbank.org/INTCHINA/Resources/Quarterly_December_2008.pdf, covering a number of topics. One chart (fig.14) which struck my eye showed China in 2007 as having the heaviest economic exposure to investment and industry in modern history, far outpacing early modern Japan and Korea.

Consumption has actually been strong over the past seven years in China. Real retail sales has grown between 10 to 20% annually. I don’t think there’s a country in the world that has seen retail sales grow that fast over the last decade. And I seriously doubt that Chinese people thus need lectures from foreign economists telling them to “go consume more”.

Despite the rapid growth in consumer spending signaled above, we see that consumption has been steadily shrinking as a percent of the economy over this time frame:

How can this happen? A massive flood of fixed asset investment, much of it going into plants, office buildings, property, highways, ports, power plants, etc.

So real growth in retail sales was 10 – 20%. Real fixed asset investment grew at about a 15% to 35% annualized pace:

With returns on new asset investment becoming increasingly low in China (witness the anecdotes of residential and office properties earning 2-3% gross rental yields), it’s pretty obvious that it’s the investment growth that needs to correct downward over coming years, not consumption growth that particularly needs to (or can) accelerate. Weak final demand means private individuals will have less, not greater desire to invest in assets or capacity.

But the WB reviews the PRC government’s 10-point stimulus program, and as I read it, the government is still primarily focused on countering this recent slowdown in asset investment, with more asset investment.

But this asset investment is apparently mostly going to be paid for by the same channels that have been funding it previously, Banks and more importantly, regional governments. So there doesn’t seem to be any really new money or motivation behind the asset investment, that has already been growing at breakneck speed. Previously, they invested because they wanted to. Now they will continue to grow because they are being told to?

It just doesn’t make sense to me how this can last.

This past asset investment has driven huge growth in consumption of steel, cement and other raw materials, making it an economy which more than any economy in recent history, was about building new stuff. The government must hope they can keep investment stable at 2008 levels. (Consensus steel forecasts for 2009 are now assuming virtually flat steel consumption in China, meaning that China alone will NOT see a decline in demand for steel globally). Thus they assume that the government will be able to prop up investment by steering it into non-entrepreneurial based channels.

In 2001, China consumed about the same amount of steel as Europe. In 2008, China consumed the same amount of steel as Europe, North and South America, and the Middle East, combined. About 75% goes to construction, i.e. fixed asset investment. Perhaps 25% goes to residential construction, 30% nonresidential, and 16% to other construction.

Yet in the forecast Credit Suisse and Worldsteel recently provided, Chinese steel demand will continue to grow in coming years.

I think the market senses that these trends must begin reversing, possibly sharply. The Chinese government cannot change the laws of economics, and turn the country into an even larger construction project than it has been, at least not indefinitely.

CLSA’s China Reality Research unit is reporting much worse estimates of activity from its retailing surveys.

Thank you for the explaination. Very very helpful.

Twofish, I am not sure what and who you are reading, but your complaint that analysts are “not looking at the important variable (the *content* of the stimulus package),” doesn’t describe any of the analysis that is taking place here. Most analysts who are skeptical about the fiscal stimulus spend much of their time criticizing the content of the spending proposals. There are four major criticisms that are widely discussed: the stimulus is too small, its planned disbursement is too slow, it is being spent on the wrong things, and it is not being financed correctly. Your claim that the “assumption that people make is that you don’t have to look at the content of the package because the markets will allocate the stimulus in ways that are maximally productive” may be correct in general, but I haven’t seen anyone make that claim explicitly or implicitly. As for whether overcapacity can exist in a country with low income levels, of course it can. Overcapacity means producing more than is likely to be consumed, and I am not sure anyone has suggested that the solution is to burn down steel factories.

Credulous, I am not sure about disinformation campaigns, but most people I know who focus on these things are pretty certain that there is a serious split in the party leadership. The article you mention is about something that has been much discussed here, and there are all sorts of whispers about Bao Tong and what his article portends.

Leon, these are tough questions and of course hinge crucially on how you define “wealth”. Bubbles are not necessarily destructive of wealth in the long term because although investors may take big losses, the full social benefit of bubble-investment is not always captured directly in asset values. For example the railroad bubble in the 1860s left many people bankrupt after the 1873 crisis, but the US was left with an enormous network of train lines that may have subsequently played a major role in UDS economic growth, so was the US richer or poorer after the railroad bubble? My guess is that investors got killed by the country benefited. The same can be said of the internet bubble. This is, however, a very controversial view. Most economists would argue that bubbles create a net loss through misallocation of capital, but I suspect what is socially optimal is not always what is optimally profitable. As for your second question, all PBoC holdings are in the form of securities abroad (mostly US and Europe), and all are denominated in foreign currencies. We are also not sure how many UST bonds are held by the PBoC because some are held directly and some are held in street names through their brokers.

I have thought about why retail spending has continued to stand up. The two asnwers I have came to are

- China being planned economy, most of the spendings are done so far on the budget that was made at the beginning of 2008. So, though people in Guangdong got laid off, people in the rest of the country still have not felt the pain and masks those laid off. Also, those laid off often have good enough spending power in the first 1-2 months.

- Maybe it is that the retail sales measurement is somehow skewed toward organized retail; and as organized retail outlets gain share against tranditional retail outlets, this sharegain masks the declining purchasing power.

Any thoughts?

Understand, Profit, and Share
http://uprofish.blogspot.com

out of the 2 trn fx reserve China has. us treas only accounts for less than 700bn, what are the rest in? cash?

I have a very basic economic question, and have asked many other. all have gave me one answer, but I am just not satisfied.

Is wealth created / destroyed or transferred during both booms and bust?

equities markets are down more than 5 trn usd globally in 08, but how much as treas gone up? just US, 30yr is up almost 40% and in total, more than 3 trn. transfer or destruction?

does anyone know if the Chinese holding of us treas in face value or market value?

trade surplus has increased by more than 250 bn in 2008, us treas holding increased by less than 200 bn. if face value, that makes sense, if market value, that means china has stop buying us trea??

i watched this over the weekend, was interesting.
http://video.google.com/videoplay?docid=-515319560256183936