Impact of China’s Manufacturing Crisis

It’s looking like a case of too little, too late in China.

The country which bet on becoming the world’s manufacturer is in very bad shape. The manufacturing sector is in decline, thousands of factories are closing each month, and millions of people are facing unemployment for the first time. As the situation worsens China’s government is doing everything in its power to get things turned around.

We are so used to China growing that we’ve forgotten it needs to be fed. China’s economy cannot thrive without the rest of the world buying its manufactured goods.

The rest of the world has been catching on to China’s manufacturing crisis in the past few weeks, but China’s government is starting to figure it out. In the past two months China has (in no particular order):

1.      Cut interest rates three times

2.      Reduced export taxes

3.      Announced an additional $425 billion in road construction

4.      Supported the U.S. dollar, making Chinese-made goods cheaper in the U.S.

5.      Lifted restrictions on bank lending

Clearly, things in China aren’t as great as they seemed just a few months ago. These are not the types of measures taken by a country whose GDP growth is dipping from 9% to 6%. They are aggressive moves that mask a deteriorating situation behind the “official” numbers.

And the analyst community is finally starting to catch on and reducing expectations for China’s GDP growth rate. The range is now expected to come in somewhere between 3% and 8% growth.

That’s just not enough to keep the lights on at most factories when you combine the slow growth with a worldwide downturn in consumption.

What does all this mean?

Over the short-term, it means there will be quite a bit change in the global manufacturing sector. After 30 years of near double-digit economic growth, China’s workers have become accustomed to prosperity and opportunity. The current economic downturn, however, has put the continuous prosperity in jeopardy.

To counteract this, China will be very aggressive in keeping the lights on at factories and keep people working. Also, China will really ramp up infrastructure spending. The $425 billion in new road projects recently announced will only be a small part of the eventual investment in infrastructure there.

It also means the U.S. dollar will continue to be supported by the exporting country. The U.S. may be bankrupt, but China will still lend to it in order to help its manufacturing based economy get back on its feet.

Over the long-term, it means China will continue to grow even stronger. It’s keeping their people at work, taking the lull in the economy as an opportunity to allow its infrastructure to catch up to the rest of the economy, and will have all the groundwork laid for a smoother-functioning world-leading economy.

We’ll probably be looking back in a couple years and realize lower oil, cement, and commodity prices made the building blocks of society extremely cheap and helped lay a foundation to accelerate China’s growth.

Basically, if you’ve got the time and are willing to use a fairly conservative investing strategy, it’d be tough to go wrong buying almost anything China related.

Good investing,

Andrew Mickey

Chief Investment Strategist, Q1 Publishing