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If The US Economy Goes Down, So Does China’s

In the past few days, Henry Paulson has come up with his US$700B proposal to save the major lending institutions which made bad decisions re CDOs, with all the bad loans being covered by the US taxpayer. This is happening at a time when the US middle class is under unprecedented pressure already.

Over the next year, all the bad decisions made by China’s economic planners over the past 30 years will show through. These include:

  • The decision to become overly dependent on the US as an export market, and buying US treasuries to effectively buy this single captive market and continue to sell it goods far beyond its capacity to pay for China’s exports.
  • Somewhere along the line, a decision was made to jumpstart China’s economy and put it on the fast-track of economic development. To a large extent, this has happened. But China’s economy is like a body builder whose upper body strength is massive, but has toothpick legs. More incidents like the melamine milk incidents will become common, simply because the government is not equipped to handle incidents of this kind.
  • China, unfortunately, has a reputation for cheap, low-quality products, in spite of the successful Beijing Olympics. For the most part, Chinese companies do not have the talent to work up the value chain creating better products. (There are some, but they are too few to make a significant difference.) This takes time to build.
  • Exports will slow, and the Chinese domestic market will not pick up the slack fast enough to prevent major unemployment problems, especially among university graduates.
  • The wealth gap between the rich and poor will widen dangerously, and real estate prices, which are already falling, will fall even more.

China became addicted to US orders and the US dollar the same way Americans became addicted to Chinese junk products. (This is a generalization; many goods are not junk. But the general image is of, well, junk.) For both sides, it was a dream which was too good to be true.

Now it’s over, and the Beijing Olympics are turning into the final hurrah for that period.

If you would like a well-presented systematic presentation, my friend Corbett Wall has written an interesting piece.

The fat days are over, and we are in for a tough 20-30 years ahead.

6 Responses to “If The US Economy Goes Down, So Does China’s”

  1. trevelyan says:

    The employment situation for university graduates has been pretty dour for a few years now, signs that the “fat times” weren’t very fat for most. I remember working with recent graduates in Shanghai who were earning 2000 RMB a month, a figure that scared me since I couldn’t picture anyone managing to survive in the city for so little cash.

    I’m not as negative about you on the China front. My sense is that this is less about subprime and housing and more about the deflation of the derivatives markets with a flight to perceived safety. Devaluations in equity markets are destroying the (paper) asset base of most large and debt-financed organizations. The US is in real trouble, and the chattering class is chattering because we’re going to see a reduction in high paying white collar jobs.

    China is in exactly the opposite situation. Sure the country will have trouble with its export sector, but those aren’t high paying jobs and domestic consumption is strong enough to pull those workers into other positions. The economy will continue to grow faster than most other regions, while China’s relative capital strength and inflation will keep work going.

    Frankly, it’s a great time to be doing business in China. Yes, people who don’t have the language skills will find it a lot harder to find good work, but those jobs are mostly with large international conglomerates and the organizations servicing them. The demand for bilingual professionals is dominant in the small and mid-sized market, where growth is continuing and organizations are much less leveraged.

  2. Lessons learned: The roadmap into Chinese e-commerce for Western companies Lessons learned on e-Business in China…

  3. Chinamatt says:

    Not sure I see the economy as pessimistically as this, but I do agree that China will get hurt by America’s economic recession. The domestic market is ready to buy products made in China, but it prefers foreign products as a public show of face (made-in-China also lacks the quality of advertising that foreign companies have). I definitely agree with the rich-poor divide and the housing prices–these have been problems and they will continue to be.

    Chinese businesses need to stop relying so heavily on exports.

    Chinamatts last blog post..Fujian Field Notes

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