It Ain’t Over Yet – China and Unemployment are Next

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Nov 08 2008
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Once I read that we shouldn’t jump as we would not be affected by the U.S. sub-prime crisis because the engines from China and India were running at full steam. I almost fell off my chair because such article could mislead novice investors in snapping up stocks without knowing what they were doing. I’ve written about it and again I would like to emphasis that nowhere in the world can we find the replacement market huge enough to take over the vacuum from U.S. Not European Union, not Russia, not Brazil and definitely not India or China. No doubt China registered mind-boggling annual economic growth but that’s because U.S. allows it. The United States and China symbiosis relationship was a unique one really.

China trade with USAMake no mistake about it – United States is world’s largest economy while China is the world’s fastest growing economy and there’s a difference between them, mind you. China depends on U.S. export market to generate jobs for its huge pool of workers while U.S. investors in China depend on continued Chinese economic growth and cheap labor. China’s economic growth was at the rate of 10% per annum during the period 1990-2004 – the highest growth rate in the world. Annually China needs to generate about 15 million new jobs to its huge population. Even during 1997 Asia Economic Crisis the dragon was growing at 8.9%, 7% and 7.1% in 1997, 1998 and 1999 respectively. As a consequence of China artificial low currency, the trade surplus jumped from $57 billion in 1998 to $256 billion in 2007 in favor of China.

China top export destinationChina top trade partnerUnited States is China’s top trading partner and literally when the former entered the recession gate, the mighty dragon was pulled down together. I guess the theory that China would face difficulties after the 2008 Olympic holds water. Those who were more optimistic brushed off such theory and opined that China was somehow insulated from any crisis included the financial problem that was staring at United States. They believed the Chinese government had the magic wand to keep the economy afloat, come shine or rain. Little did they know that Chinese consumer confidence was declining slowly but went un-noticed and when Brothers Holdings Inc. (NYSE: LEH, stock), an investment bank that is 158-year-old and survived the 1929’s Great Depression filed the largest bankruptcy (Chapter 11) in American history, the Chinese confidence speedometer jumped.

Already many China factories are closing putting tens of thousands of workers speechless and out of job. In fact every sector of the Chinese economy is slowing and credit is tightening. From annual economic growth of 11 percent in 2007 the Chinese economic muscle is expected to shrink to 5.8 percent – a level that worries Beijing because anything less than 8 percent means many more will lose their jobs. Speculators, punters and gamblers whose job were to bet on the stock market and nothing else to make a living were watching with horror their invincible Shanghai composite index fall more than 60 percent this year alone.

unemploymentLast Friday United States unemployment rate climbed to 14-year-high of 6.5 percent from 6.1 percent a month earlier. With additional 240,000 jobs disappeared in October (the 10th month consecutive month of retrenchment) this means there’re about 10 million Americans who are jobless in October – the most since 1983. The U.S. Big Three automakers namely General Motors Corp., Ford Motor Company and Chrysler are trying to get $25 billion soft loan but should any of them falls, the unemployment rate could easily skyrocket to 10 percent. The current situation is getting so bad that the incoming 44th President Obama said it was an “urgent priority” to extend unemployment insurance benefits for workers who could not find jobs – referring to his new stimulus package worth $100 billion. So, do you still think China is insulated from United States’ sneeze? But then all good things come to an end hence it’s about time China’s economy reveals its true picture.

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China just announced multi billion projects to prevent recession.

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