Mourning China

November 26, 2008 by Douglas A. McIntyre

ChinaWho has not read the accounts of China becoming the world’s largest economy, perhaps in a month or two? Or a year? Or a decade?

It will dwarf the economies of the US, EU, and Japan.

China’s GDP has been growing fast enough to make its preeminence a reasonable deduction, at least until it is not.

China cut is bank lending rate by the largest amount in eleven years. According to Bloomberg, "The key one-year lending rate will drop 108 basis points to 5.58 percent, the People’s Bank of China said on its Web site today. The deposit rate will fall by the same amount to 2.52 percent."

It seems remarkable that a country with a GDP that is supposed to grow at 10% would have a bank funds rate at well under 6%. As a matter of fact, it would seem desperate.

The analysts at the World Bank still seem to believe that China will grow at 7.5% next year. That is a big come down for a place used to double digits. It is also almost certainly too optimistic.

The math is all wrong. Most of the developed world where China sends its exports is supposed to see GDP contraction for the next three or four quarters. If the recession grows remarkably deep and long, the contraction could be severe and prolonged.

How does a nation which supplies contracting economies grow at nearly 8%? On the back of an envelope, it can’t.

Some economists would argue that the consumer consumption rate within China will keep its GDP on a relatively strong ascent. The new middle class there is one hundred million people strong.

The logic is thin. Once the demand for China’s goods begin to falter, so will employment rates in the world’s most populated country. The middle class will begin to dissolve as quickly as it formed. Consumer spending will be driven into the dirt.

China is not China anymore. At least not economically.

Douglas A. McIntyre