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Will China’s Economy Face Trouble This Summer?

[Editor’s Note: Recently an Internet article titled “SOEs Are Asked to Clear Their Real Estate Inventories. Is a Wave of Unemployment around the Corner for China?” has been widely re-posted on China’s websites. [1] It quoted some unidentified sources and also many state media reports, questioning whether the problems in China’s economy will explode soon. Chinascope could not verify the source of the information. Nevertheless, due to the topic’s relevance, we translated the article so that our readers would be aware of the information and could evaluate it on their own.]

Recently, a number of State-Owned Enterprises (SOEs) sent notices to their branches across China requesting that they sell all their real estate inventories by July of this year, even if they must be sold at a reduced price. Speculation has been rampant that, in June or July, Beijing may introduce some serious economic control policies. As a result, SOEs have been dumping their inventories to escape the consequences. Private enterprises should stay alert (while the SOEs may escape the consequences, private companies that are unaware may find themselves trapped). Li Wenjie, a board member and General Manager of the North China District, Zhongyuan Real Estate, has also confirmed the information.

A netizen with the Internet name “Wuyutong” released the information, but it has not been authenticated.

The news quickly spread on microblogs and has been forwarded more than 1,000 times. The netizen “Major Is a Man,” who has been authenticated as the General Manager of Beijing Yuejing Lianda Trade Co., Ltd. commented: “This information is likely to be true. Since the Chinese New Year, I have heard similar things from 10 people in the SOEs. It’s only for SOEs. No warnings have been given to private companies.”

According to a March 24, 2012, Xinhua News Agency article titled “State-owned Assets Supervision and Administration Commission (SASAC): SOEs Are Having More Difficulties This Year Than in 2008,” the Director of the SASAC, Wang Yong, said that a number of SOEs have stated that the current situation may be worse than the global financial crisis of 2008. Some weaknesses and deeper problems that are easily covered up and ignored during a good economic cycle are now becoming more apparent.

On March 24, 2012, China Business newspaper published an article titled, “In March, the RMB Equivalent of Official Foreign Exchange Holdings Will Again Decline; the Direction of Money Flow Is Likely to Change Drastically.” The article stated that, with the foreign trade deficit at a record high and direct foreign investment having decreased for several months, the amount of the increase in the RMB equivalent of official foreign exchange holdings in February was down 80 percent from a year ago. The March ratio is likely to show another decline. Zhuang Jian, a senior economist with the Asian Development Bank’s China Mission, told the China Business reporter: “This year, the RMB equivalent of official foreign exchange holdings will enter a declining track, which will have a relatively large impact on the mobility of the RMB. (China’s) monetary policy will change as a result.”

Mainland media published a report about Midea (one of the top 5 biggest manufacturers in the world in the home appliance industry), “The Maze of Midea: A Large Expansion Transforms into a Huge Contraction.” Over 30,000 layoffs at Midea established the record for A-share listed companies. News of the huge number of layoffs at Midea, which has been discussed widely online since the end of last year, has been confirmed.

Mainland media reported, “Shenzhen Guohong Company Is Suspected of Collecting 1 Billion from Illegal Fund-raising; Over 60,000 People Participated.” One netizen posted the following analysis: “From what has been revealed about the case of illegal fund raising, the total amount in China is definitely a scary number. (The middle and lower classes) were cheated out of trillions of yuan. The central government expects domestic demand to stimulate the economy. The money has evaporated, so what can they rely on to stimulate domestic demand? With the Sino-U.S. trade war, exports have been gradually declining; with huge local debts, it is unrealistic to invest aggressively in infrastructure projects; domestic demand does not exist either, due to the fact that the people’s money has been stolen.”

Daily Economic News reported, “In several large ceramic markets in Foshan City (Guangdong Province), many companies that do foreign trade have gone bankrupt.” Lan Weibing reported in his research on a Foshan ceramic market that, on one floor, half of the offices of the foreign trade companies have been dark and their locks are covered with dust. Obviously, these companies are either temporarily closed or have gone bankrupt.

Netizens have commented that the current economic situation is grim.

A netizen from the south responded: “This is absolutely true. This year, logistics companies from Guangdong to Shenzhen (Ed: Shenzhen is a city in Guangdong Province, but due to its special economic district status, it is sometimes considered to be separate from Guangdong) have only one third of the businesses that they used to have. It is not a single company, but the whole sector that is in trouble. Even 2008 was not like this. Small businesses are dying. A wave of unemployment will rise in a few months.” The original posting said, “I guess it will happen on a large scale after June.” …

A netizen from Hangzhou stated that news from Hangzhou reported that the court had started to auction off some real estate properties that it had closed down. The selling price was 20% to 30% lower than the market price. It might be a future trend.

A netizen who works for a coal mine revealed: “Our coal mine’s sales have not been good. We have over 100,000 tons of coal in inventory. This was unimaginable last year. The price is also 100 yuan lower per ton than last year.”

One netizen admitted to having cold sweats: “More than 70 percent of the employment in China relies on the private sector, especially the small and medium businesses. With so much unemployment, plus the diminishing foreign trade and domestic demand, the result is clear. It’s quite a big mess. What will we rely on (to lead economic growth) in the upcoming 10 years? Land transfers? Large-scale land losses? This is horrible. I think it is like it was in the 90’s. I have cold sweats. ”

Another netizen pointed out, “Now China has a huge number of government services workers. The two petroleum companies are showing losses, the five large power plants are showing losses, and ship building and steel are all showing losses. The banks’ annual reports look good. We will only find out how serious the issues of local debt and real estate are after they burst. I asked one friend who works for a rural credit union. I did not expect that even a mere rural credit union would be so deeply involved in real estate. Now we are back at the beginning.”

Some netizens exclaimed: “I was really shocked… I went to a movie and noticed that several shops on the once very bustling commercial street were closed. On the opposite side of Xu Beihong Memorial Hall, about six or seven stores under a residential building were empty. … There is a sizeable university, Beijing Normal University, nearby (but it still does not generate enough demand to keep the shops open).

Some netizens have indicated that the rich are not spending lavishly anymore. From the local newspaper, the monthly sales at the 4S stores (a popular car dealership in China that offers Sales, Spare parts, Service, and Surveys) has dropped to only 100 cars, one third of last year’s volume. Even the sales of Mercedes Benz and BMWs have dropped dramatically. The rich are quaking too. …

An Internet posting said that Chongqing City is 500 billion yuan (U.S. $78 billion) in debt. Netizens posted this analysis: “With an 8% interest rate, the city’s annual interest payment is 40 billion yuan. Chongqing’s annual revenue is 100 billion yuan. It is impossible for the city to come up with 40 billion yuan to pay the interest. Then the only thing that it can do is to default on the loans. Maybe the city did not plan to pay the money back at all when it took out the loans. In the end, the banks will be stuck with bad loans and eventually force the public to pay for it. If banks write off 10% of the bad loans, your 1 yuan becomes 90 cents. Senior officials take from national banks, and those banks take from the people. This is the result of their financial monopoly. Local debt is a serious problem around the country. Some provinces and cities have started to issue local bonds. This suggests that what happened in the 90s is happening again today.”

One netizen concluded: “History is strikingly similar. The collapse of SOEs at that time and the collapse of private companies today are both caused by serious inflation. The way out is through layoffs, but this time it will be government employees! Nothing is new here. If one does not admit his mistakes, then he has to face hardships until he admits to them. This is a heavenly principle.”

[1] Wenxue City, “SOEs Are Asked to Clear Their Real Estate Inventories. Is a Wave of Unemployment Around the Corner for China?” March 26, 2012.