Is the Chinese Economy About to Collapse?

Commentary By Ron Beasley

Back in 2008 I really couldn't understand why anyone would want to be president because it was obvious the economy was too broken to be fixed.  But it's not just the US economy - in this age of globalization economies all go down together.  I have never been bullish on China.  As I pointed out earlier China's labor arbitrage is fading.  But it's not just increasing labor costs it's also increasing power costs and shortages.

Why has Global Sticks, a manufacturer of wooden ice cream sticks, moving from Dalian, China, to Thunder Bay, Ontario?

It�s the kind of low margin manufacturing that is never supposed to come back after it leaves North America for cheaper labour abroad.

But wage costs are no longer everything they were cracked up to be. In today�s world of soaring energy costs, power rationing and export taxes on key commodities such as wood, wage gaps are less important. When the power goes off, it suddenly doesn�t matter if your labor is expensive. Factories don�t run on sweat alone.

 

As the price of the bunker fuel that transports those ice creams sticks to customers around the world tracks soaring world oil prices, the distance between your factory in Dalian and North American kids lining up at their neighborhood ice cream store, becomes more expensive every day.

When the price and availability of energy start to dominate your business plan, you say goodbye to your inexpensive Chinese labor force, and pack up and leave.

Like the rest of the world the economies of China and the US are dependent on cheap fossil fuels and China may be even more dependent than the US.  The price of coal has had an impact on the price of energy in China.  China is dependent on exports - the increasing price of bunker crude makes exports more expensive.

But there is more - from Charles Hugh Smith writing a Zero Hedge.

Despite their many differences, the economies of China and the U.S. share a number of key traits: both are corrupt, rigged, crony-Capitalist, rely on phony statistics and propaganda and operate with two sets of rules: one for the Elites, and another for the masses.

Given these similarities, it's no wonder that the wheels are falling off both economies.

There are some key differences, of course, which will make the crashing of China's boom all the harder. China's leadership likes to do things in a big way, and so its campaign of "extend and pretend" over the past three years has been unprecedented.

This isn't just the consequence of a Command Economy overseen by a Central State; the "extend and pretend" boom was fueled by stupendous borrowing by local governments and private enterprise as well.

This flood of money has severely distorted China's economy, yet the imbalances are now normalized. The system and players have now become dependent on this level of stimulus, so withdrawing the distortions would have negative consequences. Yet allowing the flood of investment to continue will unleash higher inflation, which is already triggering social unrest: Chinese Street Vendor Dispute Expands into Violent Melee.

The Euro has resulted in a shared European financial disaster.  Globalization led to a shared global fincial disaster.  But of course the ultimate problem is that our current financial system is dependent on economic growth which is dependent on cheap fossil fuels.  The cheap fossil fuels are history.