The Real World!
April 14th, 2009
Submitted by: Scotty Hayes
For the many of us who do not have a job waiting for us upon graduation, unemployment is less than four months away. To me that is a very scary thought. I have held a job most of my life and when I don’t have steady employment something doesn’t sit right with me. I guess I attribute that to my hard working parents and grandparents who have continued to sacrifice and who have worked diligently to pave the way for future generations. The main reason I am in this program is to advance my career so I can succeed in today’s business world and to provide for my future family. Yes, sometimes school is overwhelming and life is tough, but there is no doubt that this is nowhere near as difficult as the times we will all be encountering in the very near future.
Jobs are created and destroyed by the state of the economy. The economy has been the number one thing on my mind for the last several months. I have been glued to the news channels and have been reading any article I can find related to the economy, through many different means. The other day I thought, I am making a huge mistake. I realized my search for information was not complete. All this time, I had not paid very much attention to what was going on in other parts of the world. So I decided to take a deeper look at another one of the most influential global economies and here is what I found (so far.)
I started my internet search with just a simple “Chinese Economy” in the search engine and the first site that peaked my interest was the investing section of MSN. In an article written in July of 2006, it was predicted that the Chinese economy was headed for a “train wreck” by 2009, by columnist Jim Jubak.
Click here
Mr. Jubak mentions cheap money as the major contributor. Interest rates were extremely low 5-6% with an after-inflation rate of 3-4%. All of this cheap money led to real estate booms especially in and around industrial cities with double digit growth and tremendous increases of prices. Sound familiar? Also, depositor rates were low ~2%, which gave companies no incentives to save cash. So this forced companies to reinvest in fixed assets that kept adding to capacity gluts in many industries. Capacity excess is detrimental to business, but more about that shortly. At this time the Chinese economy was becoming increasingly dependent on foreign investment and exports and less on internal consumption. So what happened?
Next stop was the World Bank. The World Bank has recently put out a quarterly update for China and the longest link I have ever seen is included below:
Click here
Take a look at the report that is in a PDF file in the upper right hand corner of this page.
The World Bank recently cut its forecast of GDP growth from 7.5% to 6.5%, still very impressive by global standards. How come China has not been hit as hard as other countries? Well, their national savings rate is 51.2%. If you didn’t know, ours is negative. With this, their banking system does not rely on external financing. They also have a stimulus plan of 4 trillion Yuan or $586 billion in place that seems to be working. It includes tax cuts, infrastructure work, and social programs such as education and health care. What is also promising is the expanded enrollment in high quality and demand driven education and training programs (Their MBA programs included.)
However, as we all know there are still two China’s divided by wealth and the gap is continuing to widen. These educational programs just mentioned are expensive and very few can afford them, just like the basic education programs in China. With exports down ~25% major capacity excess is emerging, which ultimately contributes to unemployment and downward pricing and profits, which will likely turn to lower wages for the working class. One of the biggest problems I see is the fact that rural incomes continue to lag far behind urban incomes. There are many more factors to the equation, but these will definitely get your mind rolling.
May you live in interesting times - an old Chinese proverb that rings true today.
How do you see the future of the Chinese economy? How does it correlate with ours? What opportunities does it present? Business is built upon creating value. How can we learn from the Chinese and how can they learn from us?
Entry Filed under: Pre-Departure, Beijing, China
5 Comments Add your own
1. Jenna Healy | April 15th, 2009 at 5:07 am
I think we’ve all been so entrenched with the collapse of the U.S economy, not much thought has been given to other economies. I’ve been glued to the news as well, and wondered how I’ll find a job in two months?
What’s interesting is the amount that China relies on the U.S. to buy the goods they manufacture. Our spending has decreased significantly, which trickles back to China.
I think we all came into this program in hopes of furthering our careers and pay. Raquel and I were talking to a bartender a few weeks ago who had applicants with Master’s and Doctoral degrees. The manager at a local gym was turning people of the same education away for front desk jobs!
Will the one year MBAers be forced to take lower paying jobs than most of us had before we went back to school…?
2. Jessica Harris | April 15th, 2009 at 1:02 pm
Just reading this blog sends me mind into a state of panic. I think that the current job market is on all of our minds, and much like Jenna and Racquel I wonder if I will be forced to take a job I am overqualified for. Though I don’t like the idea of that, I understand that I might have to.
Though I haven’t done the amount of research that Scotty has, the point that sticks out in my mind the most is the savings rate in China in comparison to ours. HOLY COW! They are above the 50% mark while we can’t even muster up a positive number? That has to say something about how the current economic state is taking a much greater toll on the United States than it is on China.
This reminds me of a saying that my great-grandpa use to say “Take care of your pennies and your dollars will take care of themselves.” Now, I’m not saying that we should all start clipping coupons and purchasing expired meat to save a nickel, but perhaps rather than buying a 58 inch plasma screen TV when you have a 52 inch sitting at home in perfect condition, you pocket that extra cash to save for a rainy day. Looks like it might be storming for awhile.
3. Chris Carr | April 16th, 2009 at 4:24 pm
Big, but relevant questions. Too big for me to touch on here.
Anything in your macro-econ course that touches on these points?
To show you how important growth is to China, you aptly point out that even at 6.5 percent growth, the CCP will offer a 600 billion dollar stimulus package. Unbelievable. Their economy is still growing by a respectable rate and they want to super charge it even more!
Their time to pull the poor into the middle class is short, so they know they must move quickly and make it happen, or social instability will likely hit, which I would argue is bad for all of us — Chinese, the US and other.
Not all agree and they argue that social instability would be a good overall thing in China, but I personally don’t see how or get it. I don’t consider myself to be a CCP fan, but when I ask people, “if the CCP gets tossed and there is chaos in China, what happens and how will things function, and in a way that does not destroy our own US economy?”, I have not yet received a good answer to that question when I ask it of the cheerleaders for a quick and heavy handed revolution and overthrow in China.
My own feeling is that if instability hits there on a mass scale, it will not be pretty for anybody to watch and/or try to get that genie back in the bottle.
4. Logan J Travis | April 19th, 2009 at 4:07 pm
Strangely, I really wish our American political powers would take a closer look at the CCP. Not for their control of public opinion, questionable human rights, etc. but for what a “government” should do: Work for tomorrow. Actually, that phrase doesn’t capture what I mean (darn our American colloquialisms). I’ll re-write: Work for the next decade.
A quote from the World Bank Report:
“China has important short, medium, and long term challenges. The key short term challenge is to limit the adverse consequences of the downturn for employment and people’s livelihood. The medium and long term challenges are enshrined in the 11th Five Year Plan (5YP) that is now in the fourth year of implementation. The key medium term challenge is to rebalance the pattern of growth to make it more sustainable economically, socially, and environmentally (see our December Quarterly for a discussion and possible policies—page 13 and Box 3). The key long term challenge is to continue with reforms to raise productivity and living standards. The World Bank’s report on a mid term evaluation of progress in implementing the 5YP recently concluded that “significant progress has been made toward several of the major objectives of the 11th 5YP, but important challenges remain.”
Do we have a 5 year plan? Something longer? And, if we do how often do we adhere to it and succeed in the majority of outlined goals? China has the benefit of long-standing, relatively consistent ruling party. We definitely do not, so it makes a certain sense that our government functions on a truncated timeline.
During this recession our shortsightedness means pumping tremendous amounts of cash into our economy. But, China is too you say! To date, on what have we spent the largest portion of American tax-payer dollars? Buying under performing financial assets and shoring-up the banks who wrote those securities. Does that sound like a sustainable business model? Would you willingly “invest” you own money along the same lines? No, because the key to investing is future returns and growth.
China’s and the CCP’s response to this recession looks more like true investing to me. They’ve spent money on infrastructure, eduction, and securing (not always successfully) foreign natural resources. I can safely say those assets will see returns in the future, certainly more than mortgages in default and the “securities” derived from them.
5. Andrew Welborn | May 4th, 2009 at 6:46 pm
It would take a full on economic collapse abroad to bring China’s economy to a halt. Yes, they have a massive savings rate compared to the U.S., but as Mr. Judak predicted cheap money leads to bubbles. It is entirely possible China’s has yet to pop and they have only slipped due to the weak global demand for their exports. From what I have seen and heard I am still very skeptical of any financial number that comes out of China. The regional CCP leaders have a lot riding on continued growth and they could easily overstate the rates. The CCP has never been alone in this; many of the financial institutions here are being questioned about their optimistic financial reporting. Their focus on instability has key impacts in this arena and the CCP strives to keep the country on a smooth path. However, without some instability there is a risk that China may become complacent and will be unable to accommodate any blips that may come up.
The CCP most likely has a stronger plan than the U.S. and they also have the ability to execute it. From the recent WSJ article, China’s Stimulus Spurs U.S. Business, it would appear that China is beginning to regain its footing. This will be a major help to the world economy and it amazes me how quickly they have acted. The U.S could definitely learn from this. How long has it been since we started to hear about the Recession/Depression and yet we still have only had flashes of a rebound?
There is always opportunity and a lot of times a hardships are the best opportunity for a business to restructure both here and abroad. If the cheap money in China has really led to overcapacity, then there are a multitude of opportunities to perform consulting on optimal business strategies and to work for foreign firms to assist them in getting their strategies and investments in order.
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