Chinese Government Takes More Action on Economy

The Chinese government aggressively lowered interest rates yesterday by more than one percentage point to stimulate the economy. The story below from the AP is a good summary of the action.


China slashes interest rate to spur growth

By JOE McDONALD

BEIJING (AP) — China announced its biggest interest rate cut in 11 years on Wednesday to spur private borrowing and support a multibillion-dollar stimulus package to boost slowing economic growth.

The 1.08 percentage-point rate cut — the fourth cut in three months — reflects the government's urgency about raising private consumption and investment to supplement state spending on the stimulus package.

"This is the most aggressive monetary easing in recent years and should bode well for China's market performance," said Jing Ulrich, chairwoman of China equities for JP Morgan & Co., in a report to clients.

The 4 trillion yuan ($586 billion) stimulus aims to insulate China from a global slowdown by injecting money into the economy through spending on new highways and other public facilities. But its ultimate goal is to increase consumer spending, which a rate cut is meant to encourage.

Beijing is trying to shore up consumer and investor confidence and reverse a sharp downturn in growth. China's economy is expected to expand by at least 9 percent this year, down from 11.9 percent last year. But communist leaders worry about rising job losses — especially in export industries hit by weak global demand — and possible unrest.

China has avoided a big hit so far from the global financial crisis because its banks are healthy and exports strong. But conditions are expected to worsen in coming months as export demand weakens and growth in real estate and other domestic industries slows.

Just this week, the World Bank cut its forecast for China's growth next year from 9.2 percent to 7.5 percent, the lowest level since 1990.

Beijing had been rumored to be considering a rate cut and Chinese stock markets fell Monday after one failed to materialize over the weekend. The cut Wednesday was announced after markets closed. The Shanghai Composite index, down two-thirds from its peak in October 2007, edged up 0.5 percent to 1,897.88.

Also Wednesday, the central bank cut the amount of money commercial banks must set aside as reserves, expanding the pool available for lending.

The moves are meant to "promote stable credit growth," the People's Bank of China said on its Web site.

Interest on a one-year loan will fall to 5.58 percent, effective Thursday, while interest paid on deposits will fall to 2.52 percent.

The rate cut was several times the size of other recent cuts on Sept. 15, Oct. 8 and Oct. 29, which were only 0.27 percentage points.

It was China's biggest rate cut since 1997, according to Standard Chartered economist Stephen Green. But he cautioned that rate cuts alone might not be enough to trigger a wave of house purchases and corporate investment.

"To be honest, rate policy in this environment is a marginal factor — businesses think about possible returns on investments, and households will look at house price prospects," he said in a report.

"We have almost exhausted traditional monetary tools now," Green said. "What happens next is mostly fiscal policy and encouraging the banks to lend."

The amount that China's biggest banks must hold in reserve will fall by 1 percentage point to 15.5 percent, effective Dec. 5, the bank said. The minimum reserve for smaller banks would fall by 2 percentage points to 14.5 percent.

The change frees up 360 billion yuan ($53 billion) in additional money for lending, according to Green.

The rate cut will lower borrowing costs for state companies, which are expected to provide a big share of the promised investment in the government stimulus.

A key issue will be whether banks are willing to lend more. They have tried to shield themselves from global turmoil and the slowing real estate industry by cutting back on lending to exporters, developers and small companies.

"The degree of benefit realized from China's monetary stimulus will hinge on whether banks increase their lending to the most troubled sectors of the economy," Ulrich said.

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This new rate reduction combined with the stimulus program are welcome measures for Chinese businesses. The world economy will also benefit as any instability in China would be bad all around. I'm looking forward to my next trip to China to hear for myself what people there have to say about the economy. Happy Thanksgiving!!

Cost Reduction Time is Here

I realize the economy is not good and possibly really bad. It's clear that this is making people stop all decision making until "things improve". So, does that mean now is a good or bad time to consider cost reductions from global sourcing. Here are the reasons now is a great time:

1. When things are bad is exactly when cost reduction is important. Our efforts are focused on selling the benefit of cost reduction to potential customers.

2. Commodity prices have fallen rapidly. As prices on oil, steel, and other commodities have fallen we are starting to see manufacturing prices fall now as well.

3. Chinese factories are clamoring for more business. Demand is down so new projects will get all kinds of attention.

4. Chinese New Year is almost upon us. Starting new projects coming out of CNY is excellent timing.

5. Any stigma of global outsourcing is quickly receding. The global economic problems are making it clear that this really is a global economy so protectionist measures just don't make sense on the import or export sides.

It appears from recent OPSA lead generation efforts that there are lots of companies thinking the same way.

FDA Opens First Overseas Offices in China

The US Food and Drug Administration is opening an office in Beijing this month. This is the first FDA office in a foreign country and will be followed by two more in China before year-end and another to follow in India.

Here is a link to an article on this development from USA Today:

http://www.usatoday.com/money/world/2008-11-18-china-products_N.htm

The FDA has realized that OPSA has the right model - do the inspections and build relationships in China to avoid problems when containers are opened here in the US. Also, being "on the ground" in China helps to optimize operations there for better efficiency and effectiveness.

This development is a positive one for US consumers and for the US and Chinese governments. It shows continued development of the relationship between our two countries. As long as the Obama administration does not take a protectionist tact as it takes power, things are looking up.

Chinese Stimulus to Change Relationship with US

The Chinese government is addressing the worldwide economic crisis by investing more than $600 billion in infrastructure and other public works. This seems to indicate that China is moving even faster to spend it's huge surpluses on internal development rather than US debt. Over time this will be a good thing, but in the short-term it may mean more expensive debt for American consumers and the government.

It seems the impact on our business in the short-term will be minimal. Much of the Chinese economy will be export-based for quite some time, although the trend is certainly toward domestic consumption. As I've mentioned before, OPS America will need to adjust to the changing landscape by looking in new regions (for us) of China and by focusing more on complex projects that fit us well. We also will begin to help our partner factories improve their productivity. This will be the best option for continued viability of factories in Guangdong Province.

Prices Still Frustrate

Even though commodities prices have come way down over the last quarter, we are not seeing representative pricing reductions from our Chinese partners. For example, copper is down more than 50% from it's peak earlier this year. However, we are having trouble getting cost reductions on items made principally from copper.

Factories are pointing to labor costs and the exchange rate as major problems. The new labor law is being noted as having a large impact on labor costs.

Even freight hasn't come down with the decline in oil prices. When we quoted freight just yesterday the forwarders were still including the same fuel surcharges they were a few months ago when oil was well over $100 per barrel.

It appears it will take some more time for commodity prices to flow through to manufacturing and service prices. The economic slowdown should also encourage prices to come down a bit.

Taiwan Issue Risk Reduced

One key risk we advise our clients to consider is political risk. The main risk in this realm is the risk of war between China and Taiwan with the USA getting involved. The chance of this risk becoming reality is declining recently as relations across the Taiwan Straight warm.

Tuesday China and Taiwan signed a trade agreement that will increase the number of direct flights and shipments between the two neighbors. Much of the current improvement in relations started in March when the new Taiwanese President took office with promises of better relations with China. President Ma's Nationalist Party also supports eventual reunification with China, although that does not appear to be on the agenda in the near-term.

Many factories we work with are owned by Taiwanese. The warming in relations is a good thing for them as well.

Just another piece of good news for our business. Happy Election Day!