Far Eastern Economic Review: The Great Crash of China

By the end of 2007 almost half of China’s GDP growth was attributed to exports and government consumption, a dramatic reversal from 2003 when growth was dominated by investment and private consumption.

While fixed asset investment may be rising, one-third is continuing to pour into the real-estate sector (up 29% year-on-year) despite vacant commercial floor space in China rising by 6.1% at the end of July.

Guangdong Province alone, the heart of China’s low-cost manufacturing base, has seen half of the shoe manufacturing industry close shop (over 2,200 factories) this year. These are some of the low-skill, low-wage jobs China wants to replace with high value-added manufacturing. However, there has been very little preparation for laying the foundations for such an economy. The largest destination for fixed asset investment has been manufacturing, much of which has been concentrated in low-end commodities.

Do spend a moment to consider a scenario where the GDPs of China & India grow at 3-4% p.a. (instead of the 7% forecast). Now add in a slowdown in the Middle East. Yes, it is a ‘worst case’ scenario - but given what’s going on in the US & UK markets nowadays, anything’s possible.

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