China: Fighting the Undertow From the Economic Crisis

3 MINS READOct 21, 2008 | 18:34 GMT
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China's Ministry of Finance announced Oct. 21 that it will raise the export rebate on a host of goods, including textiles, furniture and plastics. China's export sector is hurting as demand in Western countries drops amid the global financial crisis. China cannot afford a rapid decline in the export sector, which employs millions and accounts for about 36 percent of gross domestic product (GDP). Beijing's fear is that a slowdown-driven fall in prices will lead to layoffs, bankruptcies and, ultimately, unemployment — which in turn could lead to widespread social unrest that could threaten the writ of the Communist Party. Export rebates amount to an indirect subsidy. They are intended to shield companies from the ravages of supply and demand, in a context in which demand is plummeting as Western economies slow down. Introducing more rebates is the easiest way for China to bolster its export sector, as these payments are harder to punish under World Trade Organization rules than direct subsidies, giving China a little more room to maneuver. In July 2007, a growing trade surplus allowed the central government to cut a wide swathe of rebates in a bid to drive inefficient companies out of the market. Beijing was hoping to move its export sector up the value chain by allowing freer competition in key sectors — but the global economic slowdown has posed a much more serious threat to the sector, leading the government to bring back a number of rebates in August 2008. Textiles and toys are two areas that will be squeezed especially hard amid the export slump. Some analysts estimate that 50 percent of Chinese toy manufacturers will be out of business by 2010. It was announced Oct. 17 that Smart Union, which provided toys for Mattel and Disney, had closed its doors. Meanwhile, sources tell STRATFOR that closures in the textile industry are becoming more frequent, especially among producers that sell solely to the United States. Some Australian clients reportedly are finding themselves unable to pay for textile orders as the Australian dollar weakens. It comes as no surprise, then, that Beijing announced Oct. 21 that the rebate for toys and textiles will rise to 14 percent, up from 11 and 13 percent, respectively. Facing a slowdown in exports, China's government is opting instead to dip into its coffers to keep production rolling. The problem with this strategy, however, is that it will lead to oversupply of goods that will either have to be stored away or dumped on international markets, driving prices down even further. China's only choice to maximize employment is to risk deflation — but it is willing to do this rather than face the social backlash from unemployment.

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