China Crisis Watch (1)

What is going to be the impact of the global financial crisis on China - if any? That question is keeping many busy, as some see China as the next point of impact of the crisis while others see it Image via Wikipediaas an oasis of financial piece.
At the China Speakers Bureau and the China Herald we have started to ask some of the leading authorities already about their first thoughts, like Paul Denlinger and William Bao Bean. Here we are going to offer a first overview of the potential battlefield, later linking to other stories and allowing readers to leave their insights, as commentors or otherwise.
Just like the financial crisis, this is a work under construction. Expect rewrites, updates and new additions as time moves on. The format is not yet clear, but we start with an overview.

China's domestic industries
The banking industry and real estate were the key triggers in the US for the start of the crisis. Both industries have their own problems in Chinam but those are very different from their global brethren. It would be wrong to call those industry Image via Wikipediahealthy, but their problems are very, very different. Compared to the US they are very cash rich, are trusted very much by their users and will keep on supporting each other, unlike what happened in the rest of the world. They do not have to be nationalized, since they are already in majority state owned.
A shake-out might be ahead in industries that rely on (foreign) venture capital and some of the IT-related enterprises might face a US-style credit crunch here, with tightening budgets, lay-offs and closures, that is mainly a deviation from the big picture.
The real estate in China is developing its own crisis, but has no mortgage crisis. No evictions, no large scale number of citizens at this stage having problems in paying back their debts.

Financials
China is sitting on a huge financial reserve, and the largest part is denominated in US dollars, the rest in other currencies. The drop of the US dollar in the recent past was of course a major problem, as this result of the trade deficit was melting away. But that meltdown has halted by now, and China can use its reserves in US dollars and other currencies to shelter itself from the crisis of even buy assets, although things do not good for the latter. Apart from investments in natural resources, China saw some high-profile collapses of its foreign investments. Partly that was due to the slow speed Beijing regulators would approve those planned investments, but more than once that lack of speed has also prevented deals that would have gone faulty otherwise. Although the current fire-sale of financial institutions might look very attractive to some - and the theory wants you to invest when stock markets are at the bottom - nothing suggests that the central government will move faster than in the past.

The export
On average 40 percent of China's economy is based on the export, 60 percent on the domestic consumption. The possibility of a collapse or shift of China's huge export industry haPanama canal
via Wikipedias kept economists busy in the past and we see two schools of thought developed here.
The first school predicts economic collapse and disaster as the export disappears, throwing China's economy in depression and disarray, bringing back economic growth to a trickle. Factories have to close down on a larger scale, China is no longer able to provide enough new jobs to keep its populace happy. Domestic demand would follow the export south. This crisis could be triggered off in two ways. First, the demand of current export markets disappears. Second, the financial credit mechanisms fail to work and even though demand might still be there, letters of credit will fail to work and trigger off a failure of the trading system.
A second school saw this as fear mongering. It believes that domestic consumption has - more than the figures suggest - replaced export as the key mover of China's economy. An economic crisis in the US would rather cause an increase in demand for China's export products, because the US market will need more and cheaper products. Keeping up China's own consumption would be key and for now there are no reasons to see a slowdown here.

Labor
A collapsing export would trigger off an industrial reshuffle, including massive lay-offs, especially in Guangdong and Zhejiang, pushing China's economy downwards and in the end lead to a halt of also domestic consumption.
That picture might be much more complicated than that. First, China's export industry has already seen over the past four, five years a huge labor problem, as a decreasing number of migrant workers came to work in the export industry. Poor salaries and better prospects at home made that factories who purely relied on poor labor conditions and low salaries were already under pressure, forced also by other rising costs for natural resources and energy. Low-end factories have been forced to close their door for that reason.
The introduction of new labor laws, both for labor contracts, arbitration and now the push by trade unions for collective agreements have been the basis of a government-induced closure of the worse companies. That has changed the landscape for the export industry already greatly, but should not be mixed up with possible effects of the current trade problems.

This is for starters, more to follow. The first China Speakers Bureau podcast are here:
Paul Denlinger on China's economic whiplash
William Bao Bean on the bleakest scenario for China

Links:
The Economist: China's economy. Domino or Dynamo?
China Vortex: Why China Won't throw a lifeline to the west
The Guardian: G7 nations face going cap in hand to China
The Telegraph: Financial crisis: China comes hesitantly to the rescue

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