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China’s Growth Prospects Dim

Posted by Steve Markowitz on March 5, 2012

US equities markets are booming.  The Dow Jones Industrial Average is teetering on 13,000, a mark not seen since prior to the financial meltdown of 2008.  Even the ongoing financial difficulties with Europe’s sovereign debt has not slowed the markets’ upward trajectory.

Today, US equities when a bit negative for the first time in a few sessions.  However, this pickup was not due to concerns about Greece or European sovereign debt issues.  Today, the potential of a slowdown in China’s economy came front and center.  With Europe and Japan bordering on recessions, China has been one of the few worldwide growth areas.  In fact, the Wall Street Journal reported that China’s average GDP has grown in excess of 10% annually for the last 30 years.  This is a remarkable number, but one that cannot be sustained.

Late last month the World Bank and the Chinese government issued a draft report with some significant, if not startling findings.  The report indicated that China will face an economic crisis without significant reforms.  Specifically, the authors are concerned about the gargantuan state-owned enterprises in China.  These firms are run inefficiently and without appropriate regard for supply and demand, which has led to growing bubbles including in China’s real estate markets.  The significant conclusions in the report, called “China 2030”, include:

  • The huge government owned corporations need to be managed by private managers, not the government.
  • China faces the possibility of rapid the acceleration in its economic activity.  This is a phenomena seen in other high-growth emerging economies in the past including Brazil and Mexico.
  • The government run corporations and Chinese banks are so intertwined that a downturn might spiral out-of-control quickly.

As this Blog has proffered many times, governments have proven to be poor allocators of capital.  While most of this Blog’s attention focuses on the weaknesses of the American government in this area, the Chinese government is likely even more inept.  While China has shown remarkable growth, this is come because of the use population and cheap access the labor.  Neither of these attributes will protect China from the inevitable corrective actions that all markets must take to keep supply and demand in balance.

We have all seen the results of governmental government in the United States.  It was such interventions that help create the housing bubble and subsequent financial meltdown.  China will not be immune from these inevitable market forces.  The danger for the West and the United States is that we have come to depend on China to lend us money at low rates.  Should China stumble, this will have ramifications many Western economies.

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One Response to “China’s Growth Prospects Dim”

  1. lee said

    S

    Maybe China would like to help GM with the development of the Volt. Obviously, their direct government management of a business is superior. The famous quote by Einstein about repeating failed ideas has never caught on among the annointed ones in power.

    L

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