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China: a new epi-centre « Previous | |Next »
December 31, 2011

Europe is an economic and political mess, and it is China's main export market. China's exports have slowed due to the economic downturn in the US and the debt crisis in the Eurozone.

Is China becoming the new epi-centre of the economic crisis in the global economy? Paul Krugman raises the question. As we know China's economic growth rested on a few simple foundations such as, keep credit cheap (and investment levels high), wages down, and the currency’s value low against the dollar. Then export your way into double-digit GDP growth. This is the East Asian "model" of development and it is based on the over-dependence on export markets with its consequences of environmental degradation.

During the global financial crisis in order to maintain high employment, China poured money into infrastructure and real estate projects through its stimulus packages.This decoupled China from the problems of the rest of the world for a couple of years.

Krugman's analysis is that behind China increasingly relying on its trade surpluses to keep manufacturing afloat is the domestic danger spot of the economy over heating.

Recent growth has relied on a huge construction boom fueled by surging real estate prices, and exhibiting all the classic signs of a bubble. There was rapid growth in credit — with much of that growth taking place not through traditional banking but rather through unregulated “shadow banking” neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting...

China’s economy is a bubble economy. And bubbles do not deflate; they pop. That means an unexpected shock to the global economy.

As the central government cools the economy, China's property prices are declining with property developers slashing prices to attract customers and maintain cash flows. The vast majority of the newly constructed apartment blocks in the major cities are nearly empty.

What happens then? The current combination of the international and domestic situation is not conducive to China's growth, which will then affect other parts of the world. Obviously China will have less demand for raw materials and heavy equipment—cranes, bulldozers, factory machinery---at a time when many Australian and Brazilian mines have undertaken massive capacity expansions. There will be rising unemployment in the construction industry and contraction in the manufacturing industry.

| Posted by Gary Sauer-Thompson at 1:55 PM |