01 December 2008

Crisis in China's Manufacturing Deepens

China’s economy, which really needs 6%-7% growth to sustain its “built for growth” economy, is watching growth decline quickly...JPMorgan recently stated it expects China’s GDP growth could drop to a 4% annualized rate in the fourth quarter of this year. That’s not just going to keep China’s economy growing to its still adolescent economy which requires a lot of capital spending to grow. _SeekingAlpha
When the US catches cold, the world gets pneumonia. That is particularly true for the BRIC emerging nations who are particularly dependent upon exports for their internal prosperity. We discussed some of Russia's economic problems yesterday. Russia's partner in crime, China, is also having some economic problems due to the slowdown of the US and European economies. China is dependent upon exports to maintain its manufacturing boom, and everything that comes along with it.
About 39% of China’s GDP is capital spending. That means a huge portion of China’s economy is building new factories, steel mills, mines, etc.

With the economy slowing down, you really can’t justify building a new factory while 10 others are getting shut down. Economies just don’t work like that.

That’s the bigger risk here. China’s economy is built perfectly for booms, but it will face a lot of trouble as more and more factories get shut down. Exports are a big part of the economy, but building the factories necessary to produce more and the housing needed to house the workers is an even bigger part of the economy.

The implications of further meltdown in China will be felt in many sectors in the rest of the world, namely oil and other commodities used to build infrastructure and production capital.

So far the oil markets have been propped up by hopes of a fairly quick recovery in emerging markets. Copper, cement, iron ore, and plenty of other commodities have experienced fairly significant price drops as well, but there’s a very real risk they could go down even further. _SeekingAlpha
As the incoming Obama administration prepares to institute its anti-market economic policies, and its anti-US Constitution social policies, the near and intermediate-term prognosis for the US economy is mixed.

The natural course of the US economy is to recover from a cyclical downturn, as capital seeks out and finds more productive uses--and as new technologies and industries open up due to invention and innovation. But the Obama/Pelosi policies promise to raise taxes, multiply regulations, encourage radical unionisation of non-union industries, create a free-fire zone for trial lawyers, and stifle innovation and to choke off the US' energy supply, raising the costs of doing business all around.

If Obama/Pelosi fulfill all of their promises to their wealthy and powerful backers, the US itself will catch pneumonia, and a persistent "national malaise" to boot. It is difficult to overstate the debilitating effects of such a depressed US economy on the rest of the world--particularly export-dependent nations such as China.

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Blogger Bearhawk said...

How much will oil at $30/barrel offset the recession-pain? I think we're facing a major economic slow down, but if China isn't buying oil (etc) for their massive growth, then cost-competition should back-off as well.

Lots of longer term impact without an economic mfg juggernaut of China slogging forward. Which will impact costs down the road of goods at Walmart, etc, but it should soften the immediate blow a bit.

An interesting and tangled web we've woven.

Monday, 01 December, 2008  

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