Thursday, December 11, 2008

If China Sneezes, Will Wichita Catch a Cold?

China is very much in the news and that news is worrisome for Wichita's economy.

The conventional wisdom among world economy watchers has been that while the U.S., the Eurozone, and Japan contract, the BRIC countries, Brazil, Russia, India, and China, will make significant contributions to global economic growth. The conventional wisdom took a blow this week. There were shocking reports that the Chinese economy is faltering.

Andrew Batson and Gordon Fairclough report, "Steep and sudden declines in China's imports and exports show the country's economic slowdown is entering a new and more serious phase -- exacerbating the global slump while challenging a generation of Chinese companies and workers used to steady double-digit gains in sales and salaries." David Winning provides more evidence: "China's monthly crude oil imports in November hit their lowest level this year, providing more evidence that a weakening domestic economy is translating into sharply reduced oil demand." Furthermore, he tells us, "Preliminary customs data Wednesday showed China imported 13.36 million metric tons of crude in November, equivalent to 3.26 million barrels a day. That's down 17.3% from October, despite a fall in crude oil prices over the month." Winning quotes "Paul Ting, an oil analyst who tracks oil trends in China, [who] said in a recent report that demand in China is now declining more swiftly than in the U.S., where oil use is falling at a pace not seen since the 1980s."

External demand has been driving the aircraft industry's prosperity. New orders made 2007 a boom year. Now things look quite different. Lex in The Financial Times reports:

"While all eyes were on Washington, Beijing was patching up gas-guzzlers of its own. On Wednesday night, China Eastern and China Southern, two of the big three state-owned airlines, announced equity injections from their parents. Both surged when they resumed trading yesterday after a fortnight's suspension. Air China was up too, in their slipstream.

"Fate has been dealing from the bottom of the deck for a while. This year alone, natural disasters and forced groundings during the Olympics have been compounded by a depreciating renminbi and huge wrong-way bets on fuel prices. China Eastern, the weakest of the three, admitted last month that fair-value losses from hedging surged six-fold in October, to almost $300m.

But while the help is welcome, it will not offset the airlines' main problem: flagging passenger and cargo revenues. Aggregate losses could top $800m this year. Admitting overcapacity for the first time, Beijing has banned new entrants to the industry until 2012 and is urging existing carriers to cancel orders. About 180 new planes are on order for 2009. This will expand the total fleet by one-seventh. At least 40 per cent of deposits on those orders have been paid, and penalties are probably too high for them to default on the remainder. Delaying delivery and letting aircraft moulder in manufacturers' hangars may not delight Boeing or Airbus but seems the smartest way to address falling loads and slashed fares.

"Textbooks say consolidation is the answer. But synergies from combining carriers across vast geographical areas with big cultural differences have never added up - Southern and Eastern, after all, are still integrating airlines they merged with six years ago. And Beijing, like Detroit, is still wedded to a vision of three big national champions bestriding the mainland - even if they are sustained by the drip-drip of state aid." -copyright, The Financial Times Limited 2008


Anonymous said...

Wichita has had one of the strongest economies during this recession. The largest industry that drives the city of Wichita is the airline industry. If the China airline industries have ordered new planes and decide to postpone orders it could harm Wichita economy. The other concern would be if United States airliners cancelled there orders and if the government cut back on orders for military puposes.

-Michael Perry

Anonymous said...

This is an interesting article, especially when the people I know working for the airplane manufacturers insist that they have enough orders to last them twenty years or more. I think that it shows that China isn't really that different from us, as when we hit a recession one of the first things to go is travel. But, it isn't like the government is telling our airlines that you can't order new planes for 3 years (well, 3 years and a month) and that they should cancel existing orders.

I'm guessing time will tell, but Wichita hasn't really seen the level of slow down that the rest of the U.S. has, though I'm not sure we are in the normal 'lag' time that we generally face. I am hoping that the estimation of 2012 by the Chinese government is a conservative date, since it would imply that we are going to be in a recession for three years, and Wichita in particular for longer than that.

Gentz said...

So OPEC is cutting total output drastically 2.2 million bpd and the cost of oil is still dropping mainly because of the lack of demand. If OPEC keeps dropping their output numbers to raise oil prices back up for their own personal balance sheets. The recession here as well as china could last way longer.

I think Wichita is pretty safe from the recession, but Wichita is not safe if our farmers start to struggle and they may struggle if high gas prices return. Putting high gas prices on our farmers would not end well in the Midwest.

In the long run high gas prices could help our country shift to more fuel efficient vehicles, but in the short run it would get nasty.

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