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Generational Dynamics Web Log for 2-Nov-2008
China's economy slowing down significantly

Web Log - November, 2008

China's economy slowing down significantly

Chinese society is at risk of increasing instability, as economic reports indicate that unemployment is surging.

China's President Hu Jintao is known to believe that the country's most challenging problem is unemployment.

If that's so, then Hu is coming face to face with a nightmare.

It's a situation that is only going to get much worse in the next few months. According to "conservative" estimates by the Dongguan City Association of Enterprises with Foreign Investment, 9,000 of the 45,000 factories in the cities of Guangzhou, Dongguan, and Shenzhen — the heart of China's industrial south — are expected to close before the Chinese New Year in late January. That could mean up to 2.7 million workers facing unemployment, in a region with tens of millions of migrant workers who depend on employment to send money back to their families in poor rural areas.

New figures indicate that profits from China's state owned enterprises (SOEs) fell 9 percent through September, after a 7.7 percent decline in the first eight months from a year earlier.

This all coincides with trends that have been building to this point:

Baltic Dry Index and price of copper for 2004 to 31-Oct-2008 <font size=-2>(Source: InvestmentTools.com)</font>

Baltic Dry Index and price of copper for 2004 to 31-Oct-2008 (Source: InvestmentTools.com)

The Chinese had been in a huge economic frenzy leading up to the summer Olympics in Beijing, but economic activity started falling off as summer approached. Activity has been trending down ever since, and now appears to be accelerating downward.

The Chinese economic bubble has been highly correlated with the Baltic Dry Index and the commodities bubble, as shown in the above graph. The Baltic Dry Index tracks the costs of shipping dry bulk goods, including commodities like copper and iron ore. The above graph shows that the BDI and copper prices have been crashing at historically fast rates, and that the crash continues.

Perhaps most ominous for many in the general population is the 69% fall in the China Securities Index (CSI 300 Index) of stocks.

China Securities Index, through November 1, 2008 (Source: Bloomberg)

I first wrote about the Chinese stock market craze in February, 2007, when it was at its peak. At that time, there were 80.5 million open stock trading accounts, with 90,000 new accounts are opened every day, overwhelmingly "retail" accounts for ordinary citizens. Millions of Chinese mortgaged their homes, and borrowed money from any source available, including their family and friends, in order to invest in the stock market.
That's great as long as the stock market bubble continued, but the CSI 300 Index has been falling sharply for months now, and there must be tens of millions of people who have lost most of their life savings.

China's economic growth has decelerated for five straight quarters. Signs of weakness span property, industrial production, export orders.

Worried Chinese officials are taking desperate measures. Many of the measures being taken are similar to those being taken in America by the Fed. The Chinese central bank has lowered interest rates this, having already lowered rates on September 15 and again on October 8. The government is increasing public spending. And the thousands of manufacturing firms that have been closed their doors are being encouraged to switch from export-driven products to products that will be consumed by the Chinese themselves.

What seems increasingly clear is that the Chinese economy itself is crashing very quickly. From the point of view of Generational Dynamics, this economic crash has been a long time coming. The Chinese economy has been growing at double-digit rates since 1980s, and no economy can continue at that rate. Furthermore, the economic activity reached bubble-level frenzies in recent years, and now the bubble is leaking increasingly rapidly.

The Chinese government is taking every desperate step it can to stop the leaking from the bubble, and try to make it grow again, just as American officials are trying every desperate measure possible to stop the leaking of the credit bubble.

Both attempts are doomed to failure. No government is powerful enough to stop these bubbles from leaking, once the leaking has begun.

In the case of China, an economic crash is a very serious matter. China has a long history of massive internal rebellions and civil wars, creating bloodbaths that have slaughtered tens of millions of people in a short period of time. As I described in "China approaches Civil War," there was the White Lotus rebellion that began in 1795, the Taiping rebellion that began in 1852, and the Communist Revolution that began with Mao Zedong's genocidal Long March in 1934.

From the point of view of Generational Dynamics, China is now about due for its next massive internal rebellion and civil war, and this collapse of the Chinese economy is exactly what is needed to trigger a new rebellion.

China's government has been out of the news for several months now, ever since the massive devastation from the Sichuan earthquake caused worldwide public opinion to change from hostility over the Tibetan rioting to sympathy. This sympathy has lasted through the Olympics games, and continues to this day.

However, new trouble in brewing in Tibet, as we recently reported. And there have been huge anti-China rallies in Taiwan, following efforts by Taiwan President Ma Ying-jeou to develop closer relations with China. These are the kinds of things that cause the paranoic Chinese government to overreact.

From the point of view of Generational Dynamics, China is headed for a massive new civil war with 100% certainty. The expectation is that such a civil war will be redirected by the Chinese authorities into hostilities against Japan and America, and that this will lead to a new world war.

(Comments: For reader comments, questions and discussion, as well as more frequent updates on these subject, see the Financial Topics and the Geopolitical Topics threads of the Generational Dynamics forum.) (2-Nov-2008) Permanent Link
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Generational Dynamics Web Log for 2-Nov-2008 China's economy slowing down significantly

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Generational Dynamics Web Log for 2-Nov-2008
China's economy slowing down significantly