China Begins To Look Like 1980s Japan

Japan hosted the Olympics in 1972, toward the end of a decade in which its economy grew 10%. Now China gets the games and word is that its GDP expansion will be a disappointing 9% this year. None of that means anything. Any country can get the games now. Luxembourg and Iceland probably have a shot.

China does have trouble, and it is not like anything the country has ever experienced.

Millions of farmers migrated to China’s big cities over the last twenty years. The country needed them to help man the factories which drove the country’s growing export machine. These new workers formed the core of a middle class in the country, a middle class which did not exist before.

In every nation where a new group of  the relatively affluent arise, real estate and consumer goods prices move up. A national stock market forms. Banks grow. And, imports become a significant part of the balance of trade. All of those things have hit a roar in China during the last five years, but the dynamics behind them are starting to come apart.

According to The New York Times, "Chinese factories reported a plunge in new orders last month. Exports are barely growing. The real estate market is weakening." China’s leaders may not think much of the politics of the West, but demand from the regions is the motor for the China export machine.

For China, two things are coming out of the slowing global economy. The first is that demand for China’s exports is falling apart. The second is that, as the rate of GDP growth in the world’s most populated county wanes, the demand for oil and other commodities is crippled. The sticker on things like oil begin to ease off.

The US may be happy about crude dropping. The counterpart to that is the US exports to China will fall as well. The Chinese don’t need what they can’t afford. Inflation in the US may slip, but so will growth.

The Shanghai Composite has already lost over half its value in less than a year. Investors began to see China’s growth problems coming several quarters back.

Japan’s cruel recession in the 1980s helped global commodities prices to fall. It also severely damaged Japan’s export machine and killed imports moving from the US and other Western economies into Tokyo and its environs.

The slowing of China’s economy looks like a good thing for now. It may bring down the price of oil. In a quarter or two, it will do undermine US exports to the region.

Pick your poison.

Douglas A. McIntyre