Tuesday, July 5, 2011

The Serious Economic Cloud Developing Over China

The accelerating price inflation in China is resulting in China's central bank slowing it's money printing. This is having the expected business cycle consequences, the economy is "slowing" as it moves away from the former central bank manipulated economy. This is not going to end pretty for China. A stock market and total economic crash are very likely.

Here's the latest report from asahi.com, on the developing crisis in China:

China's southeastern Guangdong province, the country's main export manufacturing hub often referred to as "the factory of the world," is in danger of losing its economic mojo amid a litany of woes.

Small and midsize manufacturers of clothes and other export goods that have been flooding markets around the world are struggling with rising materials costs, shortages of workers and funds and the upward trend of the Chinese currency, the renminbi or yuan.

Many of these businesses have gone under or cut back on production sharply during the current hard times, which some local business owners say are even harsher than the economic slump triggered by the global financial crisis in 2008.

Gathering economic gloom is fomenting social unrest in this heartland of China's export-oriented economy, as a recent series of riots in the province show.

Signs of downturn are abundant in Xingtang, a town in Zengcheng in the city of Guangzhou, where riots erupted among migrant workers for three days in a row from June 10.

At a sewing factory in an antiquated building in Xingtang, only about half of the rows of sewing machines were in operation.

The town is one of the country's denim manufacturing centers, bristling with some 3,000 mostly small sewing factories.

Since the beginning of this year, however, the local sewing industry has been rattled by a wave of bankruptcies. The 42-year-old chief of the sewing business said, as far as he knows, at least four business owners have "disappeared" since spring...

Smaller manufacturers in major cities in the booming Pearl River Delta, such as Guangzhou and Shenzhen, are more or less in a similar bind.

According to a senior official of the electronics industry organization of the city of Dongguang, local electronics makers are now beset by a triple whammy of higher materials costs, an acute labor shortage and the appreciation of the renminbi, which is hurting the international competitiveness of Chinese exports. More than 30 percent of the organization's some 200 member companies have already slashed output, the official said.

A local newspaper recently reported that a growing number of companies in such business areas as the toy, chemical and spinning industries are also trimming their production sharply or going out of business.

As a side note, this all does note bode well for price inflation in the United States. Productivity gains in China played an important role in smothering price inflation in the U.S. Those days appear to be gone.

1 comment:

  1. Hi Bob

    Could this not curtail inflation in the US? Here's the scenario: China is feeling a classic business cycle downturn. In order to keep growth running along at 9-10% is pumps up credit and money again and effectively reverses or halts CNY appreciation vs the USD. This means more buying of dollars and thereby allowing the US to keep exporting its inflation offshore.

    What do you think of this view? Would you agree it's possible, or is China just so over buying up USD and its CNY strengthening policy is unstoppable, even if it means business cycle downturn pain?