When the Games End, The Economic Party's Over

Filed in archive News on August 21, 2008

Many pundits are predicting that China's economy will start a downward slide in a few days. Among those nay sayers are Dexter Roberts and Frederik Balfour at BusinessWeek:

China spent some $43 billion and the better part of a decade preparing for the Beijing Olympics. But now, like a party host surveying the house as the revelry winds down, it is contemplating what will happen when the Games end on Aug. 24.

After giving a specific example or two, Roberts and Balfour point out that companies across China are "grappling with rising labor costs, high fuel prices, and the strengthening Chinese currency."

The strengthening currency is bad for exports.


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Roberts and Balfour are far from alone in making their dour predictions. Ian Williams at NBC News says that when the party ends, China's in for an economic hangover. In fact, it may have already started. NBC's Williams sounds even more pessimistic than BusinessWeek:

The "perfect storm" is being caused by the soaring price of oil and other raw materials, spiraling labor costs, and the appreciation in the value of China's currency against the U.S. dollar, as well as a sharp down turn in demand as the U.S. faces possible recession.

One economist told Williams that he should expect to see a third of the factories in Guangdong Province close in the next three year. About a third of China's exports come from Guangdong. If it were a separate country, the province's 113 million residents would make it the 11th most populous country on earth - behind Japan and just in front of Mexico.

China's stock markets are already showing the stress of a world economic downturn. The Shanghai Stock Exchange is down 60% in the last nine months. But everyone knew it was too high to begin with...

Still, China's economy continues to grow. It's just not growing as fast as last year. Exports for the first half of this year rose 22% over the same period last year. That would be a pretty hefty increase anywhere else. But last year exports rose 28% over the year before that. So the Chinese are all that happy with a 22% increase in exports.

The bottom line for Chinese export industry is simply: much of the world (America in particular) is tightening its belt and buying less.

So what does that mean for venture capital in China? We'll talk about that in a day or two...