The Great Crash of China

I’ll confess to being something of a (short-term only) sino-bear, so this piece from the Far Eastern Economic Review a few weeks ago on China’s looming economy troubles perhaps over-fits my biases, but it’s still worth reading. The gist: A combination of capital misallocation, non-performing loans, an over-rapid forced transition to high value-added manufacturing, a post Olympics malaise, a collapse in the domestic stock market, and a recession in its main export markets mean that China is going to hit the economic wall sooner and harder than its many supporters expect.

By the end of 2007 almost half of China’s GDP growth was attributed to exports and government consumption, a dramatic reversal from 2003 when growth was dominated by investment and private consumption.

While savings rates have been traditionally high, immense wealth has been invested in the stock market and real estate. The Shanghai index lost two-thirds of its value since its peak in mid-October 2007 and the Hang Seng is down over 50% from its peak a year ago.

While fixed asset investment may be rising, one-third is continuing to pour into the real-estate sector (up 29% year-on-year) despite vacant commercial floor space in China rising by 6.1% at the end of July (the latest month for available statistics). Real estate prices are experiencing their slowest growth in 18 months and new home prices in Guangzhou and Shenzhen have actually declined. Meanwhile growth in new car sales, while still robust, is slowing.

Not surprisingly, consumer confidence, according to official Chinese statistics, is drifting downwards and Western ratings on Chinese commercial banks, the holders of unused commercial real estate, are being lowered. Those on the cusp of entering the middle class are faring poorly as tens of thousands of small and medium sized enterprises go bankrupt.

Guangdong Province alone, the heart of China’s low-cost manufacturing base, has seen half of the shoe manufacturing industry close shop (over 2,200 factories) this year.

More here.

Perhaps unsurprisingly, this piece has sparked a great deal of (often emotional) debate, including here and here and here.

Originally published at Infectius Greed and reproduced here with the author’s permission.

5 Responses to "The Great Crash of China"

  1. Guest   October 20, 2008 at 10:05 am

    “Guangdong Province alone, the heart of China’s low-cost manufacturing base, has seen half of the shoe manufacturing industry close shop (over 2,200 factories) this year.”This is good news; China has a major pollution problem, and shuttering pollution-spewing factories helps to alleviate this.And Westerners have too many shoes anyhow — I mean, how many pairs do we need?!

  2. gad romann   October 20, 2008 at 4:41 pm

    Question: wouldn’t it pay for China to help us revive our economy is order to sustain their economy.It would seem to me that we need to throw almost a $1 trillion into our economy to develop our industries so they can be humming along.On top of what we already owe China, which is roughly a $1 Trillion it should pay for China to possibly double that.We could offer them the incentive that we would hold the dollar at its current value no matter hoe much it deflated.I think this idea is worth a healthy debate.None of us wan t to sit around is a recessive malaise anywhere from two to ten years waiting for the economy to get better.Whatever remedy will work in two years will also work in a year or less.

    • Ken Davies   October 23, 2008 at 11:50 am

      China has been buying US Treasurys for years with its burgeoning foreign exchange reserves. This has enabled Americans to splurge on costly wars, over-consumption and the real estate bubble. In other words, China, a developing country, has for years been saving up to 50% of its income every year while savings in the US have collapsed and the country now actually dis-saves. This is at the root of the present economic crisis. The Chinese need to consume more of what they produce, instead of working too hard to keep Americans in luxuries. The textile workers who produces your brand clothing is paid peanuts, which is why she is now using the new Labor Contract Law to secure higher, if still not decent, wages, which is why half the toy and shoe factories in Guangdong have had to close, as they were too dependent on cheap labour. Americans need to save some of their income so they can buy what they want without constantly boosting their borrowing. And pay decent prices for their imports from China. By the way, foreign-invested enterprises produce 60% of China’s exports, and because they tend also to have the intellectual property rights (e.g. patents) only a tiny proportion of the purchase price goes back to China as profit, most of it goes to countries like the US. So please don’t ask China for anything more.

  3. devils advocate   October 20, 2008 at 8:04 pm

    China values stability above all elsehow can it achieve that with very-soon rapid decline in US exports (and Euro as well)—–only by rapidly stimulating its own consumersstarting with the 700 million rural farmers – land reformand the urban 700 millions-how??? infrastructure?