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And then there was none…

And then there was none…. Jim Walker Chief Economist September 2005. China will have a severe cyclical downturn in the next two years The current upswing, dating from early 2002, is Schumpeterian in nature Business creation is destroying profits

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And then there was none…

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  1. And then therewas none… Jim Walker Chief Economist September 2005

  2. China will have a severe cyclical downturn in the next two years The current upswing, dating from early 2002, is Schumpeterian in nature Business creation is destroying profits As is natural in the late-cycle, costs are also rising China’s cost structure is amplifying the problems China’s first capitalist cycle

  3. Entrepreneurial swarming Cause? Private property rights, WTO membership – changes to the institutional framework, not inventions or innovations Creative destruction Skilled and managerial labour intensive What is a Schumpeterian cycle?

  4. Skilled and managerial workers are in increasingly short supply Wage inflation and job turnover are both high The Taiwanese talent pool is almost dry Time will solve the problem but not within this cycle Productivity growth threatened General inflation will result China’s labour shortage

  5. Banks cause cyclical fluctuations in market economies China’s banks have been a cycle-damping influence previously This cycle will be more normal Expect a secondary credit contraction after the downturn begins Another Austrian element

  6. When will it happen?

  7. China growth – profitless and jobless • We are lowering our forecast growth range for 2006 to 5-7% • Cost pressures on Chinese companies are unrelenting. The worst of the oil price increases have yet to be felt because of controlled product prices • Money supply is plentiful but money demand is faltering • Import growth profile is not about an inventory cycle. Domestic demand growth in 2Q05 around 8% compared with 18% in 2Q04

  8. Strains in the system are showing

  9. Costs are squeezing margins

  10. Jobless growth?

  11. Manufacturing sector expansion

  12. Above target M2 but no reaction China M2 growth and bank lending

  13. Import growth shows demand slowing

  14. A = 1998 China's growth cycle is here B = 2015 a = 2001 b = 2006/7 B b c = 2008/9 c a A Mitigating forces

  15. Profile of the downturn • Real GDP growth in the range 4-5% in 2007, maybe earlier • Deflation likely as credit contracts and asset markets fall • Global inflation pressures defused – commodity prices will fall temporarily • Banking sector recapitalisation will become a matter of urgency. Foreign investors will be welcomed

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