China Slowdown: Biggest Test For Communist Government Yet

There's a very good story in the Washington Post today about the slowdown in China detailing the impact of the sharp decline in the export industry and all the steps being taken by the government to counter the slowdown.

Being in the unique position of have huge cash reserves, the Chinese government has begun applying these funds liberally in the hardest hit areas.

In a report yesterday, David Burton, Asia-Pacific director of the International Monetary Fund, noted the Chinese economy "will slow but should remain relatively strong and help to support the rest of Asia".

This morning, according to this story at 24/7 Wall Street, "Dark Star" Nouriel Roubini predicts the Chinese economy "will fall apart".

Which will it be? We'll find out soon enough. Here's the Post article:

For the first time in the 30 years since China began its capitalist transformation, there is a perception that the economy is in real trouble. And for the Communist Party, the crisis is not just an economic one, but a political one. The government's response offers a glimpse into its still ambiguous relationship with capitalism -- relatively hands-off in good times, but quick to intervene directly at the first signs of a downturn in order to prevent popular unrest.

In recent weeks, local governments have set up special loans for ailing companies and initiated severance payments for workers who have already lost their jobs. Officials are candid in acknowledging the efforts are needed to head off what they call "mass incidents" -- the Communist Party euphemism for protests.

The economic devastation has been worst in the industrial centers of southern China, areas that had thrived in recent decades by producing the electronics, clothing, toys and furniture that fill retail stores in the United States.

With export orders falling because of the global slowdown and rising raw material and labor costs, more than 68,000 small companies nationwide collapsed in the first half of 2008 and about 2.5 million jobs in the Pearl River Delta region may be lost by the end of the year, according to government and industry estimates.

As the economy has soured, dissatisfaction has grown: Since mid-October, there have been dozens of labor protests involving thousands of workers at major exporters, including several publicly listed companies.

It sounds like the combination of a communist government and a free market economy is about to face its biggest test yet.

Comments

[phdinsuntan...:]

so you are shorting what????

2008 Nov 04 03:14 PM

[Michael Zhuang:]

Nouriel lives in NYC, not in Beijing. He may not know about China as much as Wall Street. It is true the China will face tremendous economic dislocation, I doubt the economy is gonna fall apart. On top of the trillions of dollar of reserve, the saving rate among common people is as high as 40%. That means China can afford to launch a Roosevelt style massive infrastructure project, such as building a mag-lev high speed rail network across the country, without running out of money. A project like that has tremendous derivative benefits to every part of the economy (and technology advancement.)

America does not seem to have the money, nor the political consensus to carry out such a project.

2008 Nov 04 04:35 PM

[fawnpass:]

While the WP article is probably accurate, so far the chinese dislocations are relatively geographically isolated. And, as the was articulated in the WP piece, the government is open about its actions, and is acting in a rather quick fashion. This is not to say that there won't be contagion, but I think it will be relatively controlled, at least in the short term. As someone who lives in China, I, and my network of contacts in China, have yet to see any financial problems in our areas. In fact, I see people that were tight with money last spring due to high inflation, openly spendng on mid to large ticket items, with recently increased discretionary income.

2008 Nov 04 09:04 PM

[fran:]

had these pundits[seats of wisdom, SEERS] been in the world of 1825 A.D., what would have been their outlook for the fledgling
'states of America'--disasters, riots, wars, crises, etc. an expectation of utter failure?

we will know when we can look back. in the interim, there is risk in all enterprise and human persuit.

ANY ONE WISH TO BET AGAINST THE ASIAN POPULATIONS--BILLIONS?...

2008 Nov 05 11:21 AM

[Nick Gogerty:]

China will most likely see significant political change in the spring or summer. nickgogerty.typepad.co...

2008 Nov 05 12:06 PM

[falanke:]

High saving, huge foreign reserves, export industry, explosive stock market, real estate bubble... um...

China 2007?

No, Japan 1989.

The Nikkei was at 38,900 in 1989. It's now at 9,000 19 years later. The gov't did everything that China is now going to do.

China is screwed.

2008 Nov 05 08:53 PM

[Dr Pandey, S.N:]

It is nearly correct assessment. China is in trouble. Export-led economic growth and development policy will lead collapse of a large number of industries in special economic zones. Huge forex reserve is the only solace.
May like to visit my blog.

2008 Nov 10 08:01 PM

[Dr Pandey, S.N:]

Thanks


On Nov 10 08:01 PM Dr Pandey wrote:

> It is nearly correct assessment. China is in trouble. Export-led
> economic growth and development policy will lead collapse of a large
> number of industries in special economic zones. Huge forex reserve
> is the only solace.
> May like to visit my blog.

2008 Nov 10 08:02 PM

[Dr Pandey, S.N:]

China organized glittering 2008 Beijing Olympics? may see full details on my blog: china-insight.blogspot... How much was the security cat call of China based on hard core intelligence? see my blog? How much did the space based Chinese infrastructure contribute to wenchuan earthwquake ? see my blog.

2008 Nov 10 08:07 PM

[Nici:]

From what I've seen and heard, I believe China is on a downward spiral headed for disaster. China has over time become widely renowned for manufacturing either inferior or tainted products, not very encouraging for the (now enlightened, and understandably suspicious) buyers. Added to that, people worldwide are taking note of China's casual attitude towards their poor, especially after the quake, as up until now, they have done very little to help the farmers. This along with other horror videos and pics (as seen on many sites on the net) where cats, dogs and other small animals are skinned alive for fur, have caused an outrage worldwide. For years people have been duped into buying these furry toys, collars and other items sold at a cheap price, along with killer baby milk, tainted sweets, deadly dogfood, bad meat, etc. Not only is the giant on it's knees because of the recession, they have also "lost face" with millions because of their lack of integrity. ... and Nici quotes: "After some time, water dripping on a rock, will eventually make a furrow". Thank you.

2008 Nov 18 06:49 AM