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will all production eventually reside in china? what exception might exist?

Jun 22nd, 2015

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The world is worried about China, but not for the right reasons. Global financial markets were roiled after the world’s second largest economy notched only a 7.7% boost to GDP in the first quarter — a drool-worthy performance for most nations, but a disappointment for a country that routinely jumped 10% or more over the past three decades. Economists are busily debating the usual: Will China have a hard or soft landing? Will the government step in and stimulate growth? Those questions miss the bigger picture. The reality is that China is unlikely to witness those astronomical growth rates, at least for some time. We may never see them again.

The recent slowdown is not a temporary cyclical blip or solely the knockoff effect of the tepid global recovery. China’s growth model is broken and can’t be so easily fixed. Since the start of capitalist reforms in the 1980s, China excelled by throwing tons of resources into a modernizing economy — mountains of cash to build factories, roads and apartment towers, and millions of poor people into making iPads, blue jeans and cars. Under China’s “state capitalism,” bureaucrats often directed the cash into massive infrastructure projects or favored industries. However, this growth engine can’t keep purring indefinitely. The pools of idle labor that filled Foxconn’s assembly lines are drying up — China’s one-child policy made sure of that, by aging the population more rapidly. The workforce has already started to shrink. Even more worrying, the state-led, investment-obsessed system spawns too much debt and too many factories, leading to wasted resources and a debased financial sector.


That’s what is happening in China today. Everywhere you look, the signs of rot are apparent. In a mad-cap quest to dominate green energy, China’s banks pumped billions into solar-panel manufacturing, creating hundreds of factories and vaulting China into the world’s largest producer. Now the sector has become a victim of its own excess: companies are failing, symbolized by the recent bankruptcy of market leader Suntech Power. Steel companies continue to invest in new capacity even though debt is rising and losses mounting. Each mill is backed by local officials eager to create jobs but dismissive of the larger costs. The investments top up GDP, but not the health of the overall economy. Inefficient, subsidized state-owned enterprises gobble up credit while more nimble private firms starve. The froth on China’s booming property market defies government efforts to calm it down. Facing meager investment options in China’s controlled financial markets, couples are choosing divorce to sidestep restrictions and taxes on apartments deals. Most frightening, debt has risen precipitously. Rating agency Fitch says credit relative to GDP reached 198% at the end of 2012, a startling increase from 125% in 2008. Local government debt has escalated in recent years, to an estimated $2 trillion, or 25% of GDP. The risks have been heightened by the emergence of “shadow banking” — mysterious, unconventional sources of lending often kept off the banks’ balance sheets — which George Soros recently warned could be as risky as the toxic subprime-mortgage securities that tanked Wall Street.


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Jun 22nd, 2015

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