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Generational Dynamics Web Log for 1-Dec-05
Slowing China economy may become deflationary due to overcapacity

Web Log - December, 2005

Slowing China economy may become deflationary due to overcapacity

Economic problems are growing against the backdrop of continually deteriorating relations with Japan

China's bubble economy, which has been growing at 9-10% a year for two decades, may finally be ready to deflate - both literally and figuratively.

According Morgan Stanley economist Andy Xie, China is suffering overcapacity in cement, aluminum, textiles and other goods, and is also constructing too many factories, buildings and resorts.

Overcapacity means an oversupply of goods to sell, which would mean a fall in prices, resulting in deflation. Deflation would "cut economic growth, cut off foreign direct investment and would destabilize Asia," according to Columbina University economics professor Robert Mundell.

Generational Dynamics predicts that this is exactly the kind of result to be expected from China's bubble economy.

Adding to China's woes is the rapid spread of bird flu in China, with reports of a new outbreak of bird flu around the country almost every day. China has recently mobilized its 2.3 million man army to fight bird flu.

All of this is occurring at the same time that China's relations with Japan continue to deteriorate rapidly.

South Korea and China will cancel planned meetings of their leaders with Japan's Prime Minister Junichiro Koizumi. Koizumi, Chinese President Hu Jintao, and South Korean President Roh Moo Hyun will all be attending a major summit of Asean nations in mid-December. Koizumi was to have met with each of the other two. Those meetings will be canceled, though a three-way meeting is still considered possible.

Japan's relations with both countries have have been deteriorating sharply ever since Koizumi visited the Yasukuni shrine in October. The Tokyo shrine honors 2.3 million war dead, including some who have been declared World War II war criminals. These visits infuriate the Chinese and Japanese, who claim that the shrine ignores Japanese atrocities including mass murder and the use of Korean and Chinese women as "comfort women" for Japanese soldiers.

Things have been boiling over all year, with anti-Japanese riots in China last Spring and a dispute over oil and gas rights in the East China sea.

Koizumi says that he doesn't understand the criticism of his visits to the shrine. "I visit the shrine as an individual who is against the occurrence of another war and to pay respect to the sacrifices of those who died in war," he says. "So I do not understand why I am criticized for this."

It seems to me that he has a point. Why should South Korea and China stay so infuriated for months over what is essentially a religious service. This is something that China and South Korea could get past, if they wanted to. So I guess they don't want to.

As I wrote last January, China's society is unraveling and headed for civil war. With the country's overcapacity and deflation, there are now signs that the unraveling of China's economy and society is gathering steam.

Every country must have a recession sooner or later, but that would be especially harsh on China, with its 150 million migrant workers dependent on the bubble economy for survival. There are already tens of thousands of regional rebellions in the country every year, and a significant rise in unemployment could lead to rapid destabilization.

I'm a suspicious kind of guy, and my thoughts keep getting drawn back to the mobilization of China's 2.3 million man army. It would surprise me if those 2.3 million soldiers weren't training to do more than kill chickens. (1-Dec-05) Permanent Link
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Generational Dynamics Web Log for 1-Dec-05 Slowing China economy may become deflationary due to overcapacity

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Generational Dynamics Web Log for 1-Dec-05
Slowing China economy may become deflationary due to overcapacity