China and the Global Slowdown

     China is facing some serious internal issues related to the global slowdown that is underway.  Growth is certainly slowing in China as a direct result of weakening global demand for its products.  This poses some significant problems for the Chinese economy since it is widely believed that China must maintain a 7-9% annual increase in GDP to maintain employment stability.  Last year growth was almost 12% and has been double digit for many years.  Forecasts for 2009 have been as low as 5-6% up to the minimum levels in the target range.

     China is turning out a large number of college educated workers each year from both its own universities and graduates who are returning from abroad.  In addition, millions and millions of the rural poor have moved to small factory towns and set up a middle class lifestyle highly dependent on continuing factory output.  If unemployment begins to rise, educated Chinese young people will have no work which can lead to organized political instability.   Adding to that, rural factory workers suddenly left without work will have a tendency to move to larger cities seeking employment rather than returning to the austere lifestyle of the deeper rural areas although a kind of reverse migration (returning to farm work from cities) is also a worry, see: http://online.wsj.com/article/SB122816637753369999.html. 

     This migration to the cities spells lots of problems for the Chinese, not only in terms of social welfare but in terms of increasing squalor, overloading sanitary systems and adding again to political instability.  In recent days, reports of rioting in factories which have slowed down and strike-like actions by cab drivers in some medium sized cities have emerged. 

     Chinese government officials see that long-term heavy dependence on exports is a recipe for economic volatility.  Manufacturing for export is a phase in the long-term Chinese plan for growth and ascendency as a world power.  As they face this current downturn, the focus is on trying to think through the beginning of a move for the economy toward a high-tech future and toward more self sufficiency.  In short, they are reliving the post WWII situation of the United States in a compressed time frame and it should be acknowledged that with a lot more time and more economic freedom, the U.S. has not made that transition from a manufacturing economy to a service and high-tech economy very smoothly to say the least.

     Construction of all kinds has slowed dramatically in China and many report that new pig buildings (for instance) which were growing like mad under a huge subsidy program for pork have also slowed like the remainder of the economy as subsidies have been substantially and suddenly reduced. (See Dr. Steven McOrist Swinecast Forecast 2009 presentation on this site).

     We are approaching a situation in both China and Russia where this current testing of economic policies is setting the stage for a potential transition in governance.  Hardliners in both states are waiting in the wings to regain power if widespread economic failure or turmoil results.  All see a future with less purchases of pork and other (especially) food items from the United States and other countries but current tension, global contraction and low output domestically will temper their ability to withdraw substantially from the global pork markets in the short run.