Brian Klein: The Great Crash of China

Brian Klein is an International Affairs Fellow of the Council on Foreign Relations. He writes in the Far Eastern Economic Review:

China is widely believed to be immune from the economic shock waves making their way around the world from the U.S. to Europe and Japan. Although it is relatively unaffected by subprime mortgages and the credit crunch, China’s economy is actually facing a fundamental structural adjustment that has arrived much earlier than expected.

Decreasing foreign demand for inexpensive manufactured goods, the misallocation of vital investment, and product safety concerns are straining China’s manufacturing base and challenging the tenuous linkages between continued economic growth and a rising middle-class.

Conventional wisdom holds that China’s domestic demand is increasingly responsible for driving growth, not exports, giving the Chinese economy a natural buffer against wild swings in the world economy. The new middle class, it is assumed, will continue buying television sets, computers, washing machines and cars – all domestically produced with cash derived from large reserves of personal savings. Domestic banks are healthy and the central government is now promoting growth through expansionary fiscal and monetary policies.

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