Thursday, August 23, 2012

Due to a Glut of Unsold Goods, Inventory Lquidation is Coming to China ... What's It All Mean? ... Nothing Good

When economies expand, more products and services are sold. As more products and services are sold, manufacturers, retailers, wholesalers, transportation companies and others experience growth in sales, profits and jobs. Governments collect more taxes and have fewer expenses, too.

That's because as more products are sold, more products are then produced. As more production occurs, more parts are purchased from suppliers. And truckers. And so on. This "virtuous circle" translates into more jobs, more income, more consumer spending and higher taxes for government coffers.

Unfortunately, an opposite "vicious circle" downward unfolds when sales decline and economies contract.

Companies can manage just about anything, but they can't manage without sales.

The U.S. bubble burst a few years ago. No news there. Debt deflation ensued. No news there either.

But the U.S. was the economic engine driving global expansion and activity. Our economy is roughly 70% dependent on consumer spending. When our consumers stop spending, the rest of the world stops producing as much. And then buying as much, too. That background of the U.S. as the engine of growth may help explain what's going on in China today. And it's not good.

China Besieged by Glut of Unsold Goods paints a disturbing picture of too much inventory in relation to demand. That results in less production and so on. The downward vicious circle described above takes over.

Here's what the article has to say about China's inventory glut and developing downward spiral:

"The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home....

(One analyst commented) “Across the manufacturing industries we look at, people were expecting more sales over the summer and it just didn’t happen,” . . . With inventories extremely high and factories now cutting production . . . “Things are kind of crawling to a halt.”

China is the world’s second-largest economy and has been the largest engine of economic growth since the global financial crisis began in 2008. Economic weakness means that China is likely to buy fewer goods and services from abroad at a time when the sovereign debt crisis in Europe is already hurting demand, raising the prospect of a global glut of goods and falling prices and weak production around the world.

Chinese export growth, a mainstay of the economy for the last three decades, has slowed to a crawl. Imports have also practically stopped growing, particularly for raw materials like iron ore for steel making, as industrialists have lost confidence that they will be able to sell if they keep factories running. Real estate prices have slid sharply, although there have been hints that they might have bottomed out in July . . . .

Interviews with business owners and managers across a wide range of Chinese industries presented a picture of mounting stockpiles of unsold goods. . . .

Premier Wen Jiabao has imposed a strict ban on purchases of second and subsequent homes, in the hope that discouraging real estate speculation will improve the affordability of homes. The result has been a steep decline in residential real estate prices, a sharp fall in housing construction and widespread job losses among construction workers. . . .

The Chinese auto industry has grown tenfold in the last decade to become the world’s largest, looking like a formidable challenger to Detroit. But now, the Chinese industry is starting to look more like Detroit in its dark days in the 1980s. . . .

The Chinese industry’s problems show every sign of growing worse, not better. So many auto factories have opened in China in the last two years that the industry is operating at only about 65 percent of full capacity — far below the 80 percent usually needed for profitability.

Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States. . . .

Automakers in China have reported that the number of cars they sold at wholesale to dealers rose by nearly 600,000 units, or 9 percent, in the first half of this year compared to the same period last year.

Yet dealerships’ inventories of new cars rose 900,000 units from the end of December to the end of June. While part of the increase is seasonal, auto analysts say that the data shows that retail sales are flat at best and most likely declining — a sharp reversal for an industry accustomed to double-digit annual growth.

“Inventory levels for us now are very, very high,” said Huang Yi, the chairman of Zhongsheng Group, China’s fifth-largest dealership chain. “If I hadn’t done special offers in the first half of this year, my inventory would be even higher.”. . .

Officially, though, most of the inventory problems are a nonissue for the government.

The Public Security Bureau, for example, has halted the release of data about slumping car registrations. Data on the steel sector has been repeatedly revised this year after a new methodology showed a steeper downturn than the government had acknowledged. And while rows of empty apartment buildings line highways outside major cities all over China, the government has not released information about the number of empty apartments since 2008, according to a report last Friday.

Yet businesspeople in a wide range of other industries have little doubt that the Chinese economy is in trouble." 

Summing Up

If China is experiencing a severe slowdown, it can weather the storm financially as it has very little debt.

That said, as its exports dry up, it can't look to its domestic customers to pick up the slack. Consumer spending is not a big part of the Chinese economy, and China has long relied on export growth and infrastructure building and commercial construction to support the growth of its economy.

The U.S. and Europe won't be buying from China as much as they historically have due to their own financial issues. And the rest of the world that supplies China with raw materials and parts for manufacturing will experience severe financial problems as a result.

It definitely looks to me like this could be a troublesome global event. 

So let's hope U.S. policy makers recognize that the private sector is our only way out of this mess. 

If they do, Chinese and others in the rest of the world will benefit from our doing the right thing. 

But, of course, American citizens will benefit the most of all.

Thanks. Bob.

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