Houston Community News >> China's Economic Roller Coaster

7/28/2006-- Trend: China's economic boom will suffer a downturn in the near future and affect the global economy substantially and here is why: History can help pinpoint five trouble spots in any breakdown in Chinese growth.


1. A collapse in profits and price of speculative companies. Industries that are marginally profitable now, such as textiles, would run quickly to red ink. Already unprofitable sectors, such as iron and steel, would become even less profitable. And the dreamed-of profits in hot new industrial sectors, such as autos, would simply vanish. Overseas investors would take a bath.

2. The walking dead will haunt the economy. China's current government has made it abundantly clear that it's willing to sacrifice just about anything -- profits, the environment, public health, judicial due process -- to preserve jobs.

3. We lose money on every sale but make it up on volume. An economic downturn in China is likely to export deflation, too. But the biggest deflationary effect will be in manufactured goods. 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 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.

5. A different kind of labor unrest. The Beijing government's biggest challenge in any downturn will come from younger, relatively privileged and well-educated graduates of China's universities and technical institutes.

First, the good news: 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. You certainly don't want to be holding shares of commodity producers if the Chinese economy does stumble, but the acceleration that will ultimately produce the wreck is likely to push stocks of these companies higher.

Now, the bad news: Because the Chinese economy remains a top-down command economy -- and not a market economy -- any economic downturn in China is likely to be relatively mild but also extremely drawn out. Because Chinese companies won't go bankrupt, because Chinese banks won't fail, and because hundreds of thousands of Chinese workers won't be thrown out of work, China's economy won't experience anything like the chaos that characterized the panics of the 19th-century United States.

But the danger is that without some version of these destructive mechanisms, after the train wreck arrives in 2009 (by my best estimate), the Chinese economy could wind up stuck in a lower gear for a long time. (Think Japan.) ... 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.

(Contributed by MSN Money)