24/7 Wall St.

China’s big stock index, the Shanghai Composite, has fallen from a 52-week high of over 6,000 to 1,974. Idiot math would say that is equivalent to the DJIA trading at 4,600. That may be a simpleton’s view of the world, but the perspectives of the foolish as not always wrong.

China announced that its GDP grew only 9% in the third quarter. That number was supposed to be closer to 10%.

According to Reuters, "A gloomy outlook lies ahead after the third quarter, and concerns about the slowdown now outweigh concerns about inflation," said Chen Jinren, an analyst at Huatai Securities.

In the US and EU a recession is still probably defined at two consecutive quarters of GDP shrinkage. In a world where 4% growth is burning up the track China’s increase of 9% seems unattainable. But, in an economy which relies on rapid growth to build a middle class and huge industrial base, even a modest drop in a torrid quarterly improvement pattern probably spells significant problems.

The economic policy in China has been relatively simple. It uses its export might to bring citizens from rural parts of the county to work in factories and other places where exportable goods are produced. This has built a middle class who have bought everything from stocks to cars. Any slowing in the process of industrialization and increased wages throws the system into a cocked hat.

For the first time since China emerged as one of the three or four leading economies in the world it is facing a situation which is cannot easily fix. As a matter of fact, it cannot fix it at all. The government has used its surplus to subsidize oil prices which in turn has lubricated a huge transportation system. That surplus is based on a balance of trade which cannot be sustained if exports falter.They are about to fall off a cliff. The central government probably does not have a five year plan to cover that.

Douglas A. McIntyre