Photo: Dr. Ed’s Blog
China’s transition from export-led growth to domestic-led growth might not be easy and could be disrupted by major social unrest. This is a very big concern among our London accounts (with whom I met with last week), particularly those who frequently visit China. They told me that Chinese officials expected to have plenty of time to make the transition. However, the sudden slowdown in China’s exports–mostly attributable to the recession in Europe–is forcing China’s leaders to scramble to boost domestic growth. Their immediate reaction over the past two years has been to raise minimum wages. That’s crushing profit margins, which tend to be razor thin even when all is going well.So now companies are scaling back their hiring. China’s industrial production rose 9.0% y/y during August, but that’s the lowest pace since May 2009. Railway freight traffic plunged 12.4% over the past four months through July to the slowest pace since February 2011. All these developments certainly explain why the Shanghai-Shenzhen 300 stock price index dropped last Wednesday to the lowest readings since March 3, 2009. On Friday, it rebounded by 5.3% on news that the government approved 25 new subway and inter-city rail projects worth $126 billion.
That’s not much, really. Why aren’t China’s leaders spending much more as they did in late 2008 and 2009 to boost economic growth? It might be because much of what they built was defective as a result of widespread corruption. The 8/4 issue of the London Times reported there were 99 road cave-ins in Beijing between July 21 and August 21 of this year. Roads and bridges are collapsing in other cities as well. Most are relatively new including a bridge that was built just 10 months ago.
The country’s former railway minister, Liu Zhijun, was expelled from the Communist Party of China for corruption in May following the high-speed train collision that left 40 people dead and 172 injured near the eastern city of Wenzhou last year. In March of this year, part of a high-speed railway line due to open in May between the Yangtze river cities of Wuhan and Yichang collapsed after heavy rain. Engineers working on some projects have complained of problems with contractors using inferior concrete or inadequate steel support bars. Consider this excerpt from the 2/17/11 issue of the NYT:
“The statement underscored concerns in some quarters that Mr. Liu cut corners in his all-out push to extend the rail system and to keep the project on schedule and within its budget. No accidents have been reported on the high-speed rail network, but reports suggest that construction quality may at times have been shoddy. A person with ties to the ministry said that the concrete bases for the system’s tracks were so cheaply made, with inadequate use of chemical hardening agents, that trains would be unable to maintain their current speeds of about 217 miles per hour for more than a few years. In as little as five years, lower speeds, possibly below about 186 miles per hour, could be required as the rails become less straight, the expert said. Strong concrete pillars require a large dose of high-quality fly ash, the byproduct of burning coal. But the speed of construction has far exceeded the available supply, according to a 2008 study by a Chinese railway design institute.”
Today’s Morning Briefing: All’s Well, But Will It End Well? (1) Life is good in London. (2) Pessimistic undertone. (3) Four concerns. (4) US wages and salaries on the edge. (5) Global growth is on the 50-yard line. (6) China’s Big Dig. (7) War talk in the Middle East. (8) Any upside left for stocks between now and the elections? (9) A few positive employment indicators.(More for subscribers.)
Photo: Dr. Ed’s Blog
Business Insider Emails & Alerts
Site highlights each day to your inbox.