Is China headed toward collapse?

A friend sent me this interesting article by Eamon Javers in Politico.

Anyone who’s traveled in China knows there is substantial over-development. Gleaming new skyscrapers sit empty and the amount of factory over-capacity is staggering. Is the PRC a house of cards? In a sense, yes. The development over the last 30 years has been hugely successful, but the annual income for the vast majoirty of the people is still not high enough to turn them into consumers in the model of the West. The consumerism in the coastal mega-cities does not extend very far inland. It is true they still depend on exports to drive their economy.

The article focuses on the demand side of the equation. PassageMaker’s focus is on the supply side and the reality is that the manufacturing capability of China is here to stay. That over-capacity will serve to keep prices low and I don’t see how the “world prices” will be set anywhere else. I do not see India stepping up to take China’s place. With the dissolution of so much of the American manufacturing sector, to say nothing of regulations and taxes that make it unattractive to run a factory in the USA, where are you going to make products? I doubt the current administration in Washington will have a change of heart and encourage the opening of new coal mines, power plants, steel mills, etc.

Is China weaker than it appears? I would say yes, but that does not mean it is going to implode. We are all in for a rough ride the next few years, all of our own making, but China has cash and industrial capacity and I personally believe they can weather the storm. PassageMaker is hedging its bets by proceeding with plans to open another Assembly Center in Mexico, but there are no plans to exit China.

Even if the financial crisis leads to social unrest, the people of China have seen over the last 30 years what they can accomplish. While there are hundreds of millions of peasants in China, there are also now millions of managers, engineers, businessmen, entrepreneurs, etc., and they are not going to vanish. PassageMaker is planning for long-term growth and so far I think we’ve chosen wisely.