Friday, July 6, 2012

Economic slowdown and China

SHANGHAI — For three decades, China has enjoyed astronomical growth through massive government investment and by becoming the world’s exporting powerhouse. But those days are coming to an end, and the government is looking to Chinese consumers to drive future expansion.

But a tradition of thrift and a historic mistrust of officialdom is thwarting efforts to persuade the Chinese to spend more, experts say. And with China’s economy in the midst of a major slowdown, the government has not yet moved away from restrictive policies that also discourage spending.

On Thursday, China made its latest move to combat the slowdown, cutting key interest rates – the second rate cut in a month.

Chinese remain among the world’s stingiest consumers. Household consumption in China accounted for a paltry 35 percent of the overall economy in 2010, compared with 71 percent for Americans and 57 percent for Europeans.

Chinese also save far more than others, with an average household savings rate in China of 38 percent in 2010, compared with just 3.9 percent for Americans and 2.8 percent for Japanese, according to figures compiled by BloombergBusinessweek magazine, using statistics from the World Bank, the OECD and other data.

And while younger Chinese have begun to buy more, save less and take advantage of credit more often than their parents, the old habits appear to be eroding slowly and may change only with a new generation.

“I don’t see the need to consume that much,’’ said Patrick Zhou, a married 36-year-old Shanghai lawyer with a 2 ½-year-old son. Zhou said he and his wife each save about half of their income each month, which still leaves them with enough money to eat out regularly and take a yearly vacation. “We have our house. I have my car. We travel every year,” he said

The high rate of savings contrasts with the increasingly visible consumerism apparent in cities like Beijing and Shanghai, which are filled with Ferraris, shopping malls and luxury boutiques.

Only Chinese older than 50 cling to more conservative spending habits than those in their 30s and 40s, said Shaun Rein, managing director of the Shanghai-based China Market Research Group and the author of a new book called “The End of Cheap China.’’

The exception to the savings-first rule appears to be the 20-something generation, veritable spendthrifts compared to older Chinese, with “an effective savings rate of zero,’’ Rein said. These Chinese were born after China’s opening to the world in 1978, grew up with relative affluence and they want the latest iPad and iPhone.

The reasons why Chinese save more and spend less are complex, stemming in part from tradition while also acting as a response to government policies that discourage consumption. People older than 50, who save more than 60 percent of their income, remember a period of economic hardship and political chaos: the “bitter years” of the Great Famine, from 1958 to ’61, and the violence of the Cultural Revolution from 1966 to ’76.

Some younger Chinese have carried on that tradition of thrift. Tony Ren, a 30-year-old married Shanghai accountant, saves about half his $2,600 monthly salary, but says he doesn’t feel like he’s wanting for anything. “Maybe I'm too busy to have a lot of time spending money,” he said.

BANGKOK (AP) — World stock markets fell Friday as gloomy economic reports from the world's two biggest economies heightened fears of a sharper global downturn. In Europe, leaders were set to weigh options for fixing the continent's debt crisis.

The leaders of Germany, France, Italy and Spain are gathering in Rome on Friday to try to hammer out proposals for easing the widening financial crisis spreading across the 17-member euro currency union.

Concrete proposals will be brought to a wider gathering of EU leaders on June 28 and 29.

European stocks dropped in early trading, mirroring losses in Asia. Britain's FTSE 100 lost 0.9 percent at 5,516.30. Germany's DAX fell 1 percent to 6,277.90 and France's CAC-40 slipped 0.8 percent to 3,089.24.

But Wall Street appeared headed for a higher opening, a day after the Dow sustained its second-worst loss of the year. Dow Jones industrial futures rose 0.4 percent to 12,546 and S&P 500 futures added 0.4 percent to 1,323.50.

Japan's Nikkei 225 index fell 0.3 percent to close at 8,798.35 and South Korea's Kospi slid 2.2 percent to 1,847.39. Hong Kong's Hang Seng lost 1.4 percent to 18,995.13 and Australia's S&P/ASX 200 was down 1 percent at 4,048.20.

Benchmarks in Singapore, Taiwan, Thailand and Indonesia fell while the Philippines rose. Markets in mainland China were closed for a public holiday.

On Thursday, the U.S. Labor Department reported that the four-week average of applications for unemployment benefits jumped to the highest level in nine months. Meanwhile, sales of previously owned homes fell 1.5 percent in May.

A further sign of weakness in the world's No. 1 economy came from the Philadelphia branch of the Federal Reserve, which issued a report showing that manufacturing in the northeast had experienced a sharp decrease due to a steep fall in company orders.

Appetite for financial assets such as stocks was also dented by the results of a monthly HSBC survey, which showed that manufacturing in China has continued to contract. China's growth has been a pillar of the global economy in recent years, so its slowdown has been of particular concern to investors.

"With signs of weakness in the US economy, the persistence of the eurozone debt crisis and the threat of a hardlanding in China looming, the prospect of a synchronized economic slowdown is real," analysts at DBS Bank Ltd. in Singapore said in a market commentary.

Sentiment was also shaken after Moody's Investors Service lowered the credit ratings of 15 major banks, including Bank of America, JPMorgan Chase and Goldman Sachs, saying their long-term prospects for profitability and growth are shrinking.

Downgrades generally make it more costly for banks to raise money by selling debt because investors demand higher interest in return for taking on riskier debt.

"Of course, they deserve it for years of mismanagement and speculative trading activities ... and also the exposure to sovereign bank debt," said Francis Lun, managing director of Lyncean Holdings in Hong Kong. "So, as a result, all these major international banks are being downgraded to a more realistic level."

Asian financial shares sputtered after the ratings slap. South Korea's Shinhan Financial Group Co. tumbled 3 percent while Australia & New Zealand Banking Group lost 1.4 percent. Hong Kong-listed Industrial & Commercial Bank of China, the world's biggest bank by market value, fell 1.2 percent.

Falling commodities prices hurt mining and raw materials shares in Australia. BHP Billiton, the world's largest mining company, fell 2.1 percent. Newcrest Mining Ltd. dropped 3 percent. Hong Kong-listed Jiangxi Copper Co. fell 2 percent.

Benchmark oil for August delivery was up 10 cents to $78.31 per barrel in electronic trading on the New York Mercantile Exchange. The contract fell $3.25, or 4 percent, to settle at $78.20 per barrel in New York on Thursday.

In currency trading, the euro fell slightly to $1.2556 from $1.2558 late Thursday in New York. The dollar rose to 80.33 yen from 80.29 yen.


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