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Porsches no sign of turnaround

(China Daily)
Updated: 2009-05-18 08:03

It took only half an hour for 19 new types of Porsche cars to sell out at last month's Shanghai auto show.

Rich business people from Zhejiang and Jiangsu provinces bought most of the luxury cars. The two provinces in the Yangtze River Delta are famous for their booming private businesses.

The popularity of the Porsches was interpreted by some as a signal of people's reviving consumption ability and a prelude of an economic turnaround. But, in a way, the private entrepreneurs' indulgence in luxury goods indicates the economy is still cold; amid the financial crisis they are spending on themselves instead of expanding investments.

Related readings:  China's foreign trade down for sixth month  Number of new private enterprises in China drops  Bank loan plummets to $86.6b in April  China drives sales for global majors

An old friend who operates a big private business in Zhejiang recently said that production at his enterprise has declined by two thirds compared with the peak period. Since April, overseas orders have increased mildly but are still less than half of what they were at peak.

The employees of local businesses never enjoyed May Day holidays in the past, often working overtime to finish orders instead. But this year many firms organized tour trips for their employees.

Local businesses are mainly engaged in making textile and leather products. During the past year, the cost of renting shops has greatly increased and the number of customers has shrunk, forcing many businesses to close their doors.

The bigger obstacle to local business development is lack of access to loans. Banks have not totally shut their doors to private businesses but lending conditions are harsher. With 20 million yuan ($2.93 million) worth of land and workshops as mortgage, a business used to be able to get more than 20 million yuan in loans, but now a business with the same assets can get only 6 million yuan. With the uncertain economic situation, creditors worry that the mortgage value of small private businesses will shrink by big margins since such companies are bearing the blunt of the economic downturn and are more vulnerable to bankruptcy.

Local private business owners usually have poor education backgrounds. When the investing environment is not good, they spend their accumulated wealth on luxuries. They have little knowledge about famous brands and once someone in the neighborhood purchases a big-ticket item, many follow just to show off their wealth.

The rush to buy Porsches at the auto show is likely an example of this, rather than a sign that the economy is about to regain its former momentum.

Ye Tan is a commentator on economics based in Shanghai.