Fausta’s Blog

Via the Baron, three articles from Asia News:

Government officials arrested: Beijing powerless against corruption

Economic growth has benefited the corrupt politicians and businessmen. This is the opinion of experts, in the face of continued serious corruption cases. A former parliamentarian and torchbearer, and a “model” businesswoman, has been arrested. As has the second richest man in the country.

Chinese leaders in panic over crisis and unemployment

A rapid rise in unemployment is expected, because of the shutdown or lower production of many companies. The jobs of 120 million migrants are at risk, but also those of 6 million new graduates. Social protests are growing among workers fired without proper severance pay.

World Bank: Chinese growth will fall to 1990 levels

The World Bank warns that the situation could become even worse. Beijing, preoccupied over rampant unemployment, is addressing the problem by stimulating domestic consumption. But meanwhile, it is unable to contain the growing social protests.

Ed posts about China feeling the pinch

The Post reports that Hu has more on his mind than a cyclical business contraction. The Chinese manufacturing sector needs constant growth above a certain level to keep its population satisfied enough not to revolt against the oppressive central government. While China is still expected to grow its economy during this downturn, the question is whether it will be enough to keep up with demand for work.

At Red State, Francis Cianfrocca’s China Devalues Its Currency
Going For Export Growth lookst at China’s foreign-exchange position.

This situation has dire repercussions on Latin American economies. As I was mentioning in today’s Carnival, China seeks greater influence and trade into Latin America. Compared to Russia, China is “the new partner that matters”, as The Economist put it.

On the positive side,

Mr. Hu also played a major role in the G-20 meeting in Washington at the beginning of his most recent trip. China’s active cooperation, which Mr. Hu promised again in Lima, is critical in efforts to work out the current financial crisis. China now has much to gain from helping Washington survive and from funding the World Bank and International Monetary Fund.

On the negative side,

Confusion and disappointment over China’s misunderstood promises of foreign direct investment have been compounded by disingenuous reports from Beijing. One Chinese trade official claimed that $22.7 billion in FDI had been placed in Latin America by the end of 2006. If so, the vast bulk was plunked in tax havens in the Caribbean from whence it can be sent back to China to take advantage of preferences given to foreign investment firms. Also, some of Latin America’s problem may be that the Latins have failed to propose viable investment projects.

From the point of view of Latin America, diversification is a very good thing. For diversification with China to be a meaninful force in the region, the Chinese economy must remain strong.

And that’s where the problem lies: If the Latin American economies become overly reliant on the Chinese, their collapse will be catastrophic. Let’s hope the trend towards diversification is genuinely diverse.

Capital Commerce posts regularly on the the geopolitical and economic fallout of a sharp slowdown in China’s economy:

Simply put: Slower growth could lead to dangerous political instability. The sole source of the authoritarian government’s legitimacy has been its ability to deliver an even-rising standard of living for more than a generation.

Go to Capital Commerce and read back.

UPDATE
If you think all of this has nothing to do with you, read Kudlow:

The real source of today’s stock market plunge is a collapse of China’s purchasing managers index, which fell to 40.9 in November from 45.2 in October, its fourth straight monthly drop. Inside the index, export orders fell significantly. All of this suggests big cuts in China production, employment, and investment, including infrastructure investment.

Over dinner last week economic Nobelist Robert Mundell, who advises the Bank of China and travels there every other month, told me the Chinese economy is in bad shape. As a bulwark for the global economy, the China card is fast turning unreliable. Not only are stocks falling everywhere else in response to this disappointing China news, but commodity prices like palladium, silver, gasoline, oil, and gold are all plummeting today. I’ve only seen one news story that reported on this China economic decline, but I’m convinced it’s the main factor behind the U.S. stock drop.

Meanwhile, China’s yuan is starting to depreciate This development may be a function of China’s weakening economy, but it also may be a policy change by the Bank of China toward devaluation rather than appreciation.

I’d like to reiterate my support for Mr. Mundell’s idea for a one-year tax holiday on U.S. corporate profits, then segueing to a 20 percent marginal tax rate on U.S. business from the current 35 percent rate. It is business, not government, that creates economy-growing jobs. Although U.S. profits have slipped (IRS/NIPA profits after tax have dropped 9 percent from their peak in late 2006), they still totaled $1.5 trillion thru the end of the third quarter. After tax, that’s $1.1 trillion.

So, with roughly a $400 billion tax bill at stake, a tax-free holiday would provide a big pool of cash for U.S. business recovery. And a lower marginal tax rate after that would make it pay more after-tax to invest in businesses. The Mundell tax-cut recovery plan is especially important now that the NBER has just officially declared a recession beginning in January.

Once again, I repeat, government cannot spend our way into prosperity. However, strengthening incentive rewards would boost the animal spirits of investors and businesses to put risk money back to work. This would produce economic recovery.

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This entry was posted on Monday, December 1st, 2008 at 5:24 pm and is filed under China, Latin America, business, economics. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.