Sjeltur

China announced a stimulus package to boost the economy, worth $586 billion, or almost a fifth of the country’s gross domestic product (GDP) last year. The extra spending should increase the economic growth by 2 percentage points next year. Before the announcement it was estimated the economy would grow no more than 7.5% next year. Compared to other economies that growth percentage looks really good, but China used to have growth percentages up to 12%.

Those days are gone. China is starting to experience the effects of the global financial and economic crisis. Take the southern Chinese city of Guangzhou, tens of thousands of migrant workers are leaving the city after losing their jobs. Guangzhou is one of China’s largest manufacturing hubs, many export companies have collapsed here. The most badly hit companies are toy, shoe, and furniture manufacturers. Chinese authorities are worried about social unrest.

A total of 3,631 toy exporters, or 52.7% of the industry’s business already shut down in China this year. The latest victim is Smart Union, a major toy manufacturer in Dongguan, about 6,000 employees lost their jobs. According to a human resource worker of the manufacturer: “The main reason for the closure is we are too dependent on the US market, which has become sluggish.”

China needs an economic growth of at least 6% just to create jobs for the 3 million people joining the labor force every month, one million of those people being poor rural farmers moving to the modern industrial urban sector. With growth falling close to this percentage, the Chinese government feels it is forced to pump a large amount of money into the economy. The Chinese economy is structurally dependent on exports, especially exports to the US. Only a year ago Chinese exports to the US were growing at an annualized rate of more than 20%, now it has fallen to 0% and it’s getting worse. The upcoming US holiday season will most likely be the worst seen in decades, resulting in a huge amount of unsold goods manufactured in China, more companies going down, and higher unemployment. Many countries in Asia, Africa and South America will suffer too, as Chinese demand for raw materials is collapsing.

Some economists used to think the growth of domestic consumption in China would compensate a decline in exports. It’s clear now the decline is much worse than previously thought. Despite the positive reactions we saw on the markets, the fact that the Chinese government feels the stimulus package is necessary is actually very worrying.