China's Train Wreck
MSN's Jim Jubak follows up on How China's Train Wreck Could Hit Us Too.
JJ see's China suffering a major economic break in 2009, we concur that major economic events will occur globally just after the 2008 Summer Olympics in China. Our comments in Italics...
1. A collapse in profits and price of speculative companies. (i.e. textiles, iron and steel and autos) Overseas investors would take a bath.
2. An economic downturn in China is likely to export deflation (not just to commodities markets.) The biggest deflationary effect will be in manufactured goods.
3. Think it's tough to compete with China on the price of manufactured goods now? Wait for a downturn, when companies are told to keep workers employed and busy producing even if the finished product is just piling up in warehouses.
4. Who will eat the bad loans? the Beijing government has guaranteed that some of the world's deepest financial pockets will be available to bail out China's banks in the next crisis.
How? By selling off stakes in the country's biggest banks to overseas investors i.e. American bankers.
What would happen with a soft Chinese landing?? The Chinese economy is likely to consume even more of the global supply of commodities as it speeds out of control.
Look for prices of iron, copper, nickel, coking coal and other raw materials to continue to climb into 2007, at least.
Because the Chinese economy remains a top-down command economy -- and not a market driven economy -- any economic downturn in China is likely to be relatively mild but also extremely drawn out.
Why? Because the Chinese Communist leadership will not allow companies to go bankrupt, banks to fail, and hundreds of thousands of Chinese workers to be thrown out of work.
The Communist leadership cannot afford to have this happen and will cover it up and throw every excess dollar they have at the problem.
The Chinese economy could wind up stuck in a lower gear for a long time. (Think Japan.) A lower gear might be just 7% GDP growth by the official numbers.
7% GDP growth still represents just breakeven in China's race to find jobs for all the new workers its population throws up each year.
And 7% growth would be a huge four percentage points less demand growth for the global economy.
That's enough of a decline in demand to send shock waves through national economies that are depending on high commodity prices to provide the cash to meet the aspirations of their own populations for jobs and more consumer goods.
Many of the national economies that will get squeezed hardest by any slowdown in China belong to politically unstable regimes; Russia, Iran, Saudi Arabia and Venezuela come to mind immediately.
A slowdown in China means increased unrest in those already troubled areas and yet a further step up in volatility for an already volatile world.
We also believe that any significant slowdown in the US consumer's spending (i.e. through higher interest rates, petrol prices, a housing sector slowdown or all of the above) will begin to tip over the same set of global dominoes.
JJ see's China suffering a major economic break in 2009, we concur that major economic events will occur globally just after the 2008 Summer Olympics in China. Our comments in Italics...
1. A collapse in profits and price of speculative companies. (i.e. textiles, iron and steel and autos) Overseas investors would take a bath.
2. An economic downturn in China is likely to export deflation (not just to commodities markets.) The biggest deflationary effect will be in manufactured goods.
3. Think it's tough to compete with China on the price of manufactured goods now? Wait for a downturn, when companies are told to keep workers employed and busy producing even if the finished product is just piling up in warehouses.
4. Who will eat the bad loans? the Beijing government has guaranteed that some of the world's deepest financial pockets will be available to bail out China's banks in the next crisis.
How? By selling off stakes in the country's biggest banks to overseas investors i.e. American bankers.
What would happen with a soft Chinese landing?? The Chinese economy is likely to consume even more of the global supply of commodities as it speeds out of control.
Look for prices of iron, copper, nickel, coking coal and other raw materials to continue to climb into 2007, at least.
Because the Chinese economy remains a top-down command economy -- and not a market driven economy -- any economic downturn in China is likely to be relatively mild but also extremely drawn out.
Why? Because the Chinese Communist leadership will not allow companies to go bankrupt, banks to fail, and hundreds of thousands of Chinese workers to be thrown out of work.
The Communist leadership cannot afford to have this happen and will cover it up and throw every excess dollar they have at the problem.
The Chinese economy could wind up stuck in a lower gear for a long time. (Think Japan.) A lower gear might be just 7% GDP growth by the official numbers.
7% GDP growth still represents just breakeven in China's race to find jobs for all the new workers its population throws up each year.
And 7% growth would be a huge four percentage points less demand growth for the global economy.
That's enough of a decline in demand to send shock waves through national economies that are depending on high commodity prices to provide the cash to meet the aspirations of their own populations for jobs and more consumer goods.
Many of the national economies that will get squeezed hardest by any slowdown in China belong to politically unstable regimes; Russia, Iran, Saudi Arabia and Venezuela come to mind immediately.
A slowdown in China means increased unrest in those already troubled areas and yet a further step up in volatility for an already volatile world.
We also believe that any significant slowdown in the US consumer's spending (i.e. through higher interest rates, petrol prices, a housing sector slowdown or all of the above) will begin to tip over the same set of global dominoes.
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