By John Humphrey
Expectations about the impact of the financial crisis in China seem to have gone through three phases. The first was optimistic, suggesting that China had become more delinked from the global economy and less dependent on exports. The second was more pessimistic, driven by the realisation last year that there were very substantial declines in Chinese exports. There were estimates that as many as 20 million people lost their jobs in the heavily export-oriented cities of the coastal South. The third phase, which has just become evident, is a view that there will be a slowdown, but not a crisis. The IMF has reduced its prediction of growth in the current year to 6.5%, but this is still good by global standards, even if half the rate of a couple of years ago. In part, this cautious optimism is the result of government measures to stimulate the economy by promoting infrastructure spending and rural incomes.
There has been a dramatic fall in imports into China, particularly from the East Asian region. As China's exports fall, so does demand for the imported parts and components that are incorporated into the export product. However, rather sensational data showing drastic year-on-year falls in imports may overestimate the problem. First, the overall level of imports must have fallen in part because of the decline in commodity prices in 2008. We need more data on import volumes as well as values. Second, there might well be a short-term de-stocking tendency. Demand for Chinese products in the United States and Europe fell sharply last year. As it takes time for products to reach these markets, retailers will suffer over-stocking as deliveries are maintained at previous levels for some time after sales start to fall (or in the case of garments, they may pile up in the warehouses of suppliers in Europe and the US). Faced with excess stocks, retailers not only cut back orders to reflect the new lower level of demand, but also compensate for the excess stocks that have built up. The same effect happens to assemblers in China. They carry on producing, experience a decline in orders and then reduce production to compensate for both over-stocking and lower demand. They, in turn, go through the same processes with their suppliers. If this effect really does occur, it means that short-term falls in imports of components could be much greater than the medium-term equilibrium level of production and demand during the crisis.