A little late to the party on this one, but China’s Longmay coal company has announced it will lay off approximately 40% of its total workforce, at around 100,000 employees.  This underscores the immense global volatility the emerging Chinese economy has created through levering up their industries.

20150206_bdiy
A retracement in the global trade flows which emerged during the exuberance following the 1980s stock market crash.  The “The future’s so bright I gotta wear shades” era.

Back in 2011, I remember discussing the Chinese problem in a bar with some friends. The problem they face is due to globalization and the enormous volume of international trade flows which subsequently collapsed after 2009.

Why is China in dire straits (pun intended)?

Prior to 2007 in the high degree of globalization meant that the US and China had a bizarrely symbiotic relationship, with the US being the global consumption hub of the world and China being the global production center.  The declining globalization which followed the crisis mirrored the collapse in globalization in the early 20th century, which, as we know went well for Europe with the advent of two World Wars and an era of massive unrest.

In short, China now has huge overproductive capacity and overlevered industries which are hitting the wall because global consumption has fallen off a cliff.  I’m told (by a Chinese economist) that since 2009 China has been trying to offshore a lot of their capacity to Africa in order to take advantage of the differential in purchasing power between the Yuan and the African currencies.  Obviously this strategy has only been so effective.

Globalization works well, until it doesn’t.

ourworldindata_migration-financial-integration-and-trade-openness-from-1880–19960
Global trade openness and financial integration courtesy of OurWorldData.org:  Notice the spikes prior to the 1940s at the height of European War, followed by a decline and rebound into the modern era.

This is why I explained earlier in my article on solutions for the UK Steel industry that UK subsidies for the steel industry could, and should be considered, with a fixed time horizon, provided the public sector has the funds.  With globalization retracing, this is an economy storm for commodities, borne by China, which the global producers will need to endure.

So where now for China?

They have been suffering from capital outflows, Chinese people running into asset markets all around the world in foreign currency, to try and protect their wealth.  This is ongoing.

I suppose the offshore Yuan (they have a two-tiered currency- one offshore, one onshore) could see even more devaluation in the short term. Ultimately they will need to let the excess capacity out of their economy which I suspect they have already been trying to do.  The government seems to be trying to steer them in for a “controlled crash landing” rather than a wholesale “nosedive” into the dirt.  Either way, China may well be witnessing the early or mid-stages of their own Great Depression.  After their economy has restructured, their currency will need to appreciate versus global currencies, which means transitioning to a free-floating currency and doing away with their previously mercantilist policies.

And speaking of their two-tiered currency, the spread between the offshore and onshore Yuan has recently hit 2011 highs, suggesting that something is amiss between their international currency and their currency at home.

Chian_3.jpg
If things get much worse, they might need to renovate the Great Wall to keep the Mongolians in.

In any event, the Chinese people seem to be trying to get their hands on as many US Dollars as they possibly can and this massive layoff is bound to cause social instability in mainland China.  It’s probably fair to say either way that in times of retracing globalization, misery loves company.  They won’t be alone in their economic woes.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s