China, Back To Candles & Rice Farming

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Everyone wants to know when the "recession" in China with 8% growth will start to level off.  If you read the WSJ this morning, you will see another ominous sign that China is not heading back strongly into that that post-Industrial Age as fast as many would hope.  The new metric showing more pain to come is in the rapid drop in electricity usage.

The Journal noted that China reported its first decline in monthly electricity output in four years with a 4% decline in power generation in October from a year earlier.  This only deepens what has become the most severe falloff in electricity output in a decade.  As factories are sending out fewer goods and as the infrastructure machines slow down, power needs and electricity needs may only drop further.

China’s value-added industrial production rose 8.2% in October, and while that would be awesome for the US or any developed nation it is the weakest reading in China in four years.  Heavy industries also went far south, with iron and steel production down a whopping 17% and even a slight drop in autos.

Will China’s $586 billion stimulus package help that much?  Maybe, but not much or at least not like you would hope.  For starters that is spread out over a two-year period, and much of it had essentially already been factored in from prior infrastructure projects already on the books.

A ship broker recently outlined the problems in China.  A ship costing over $200,000 per day from South America to China in May went for just over $10,000 a day recently.  He noted how the docks and ports in much of China are full, and how they just simply can’t accept more inflows of materials.  And the quote was the best: "It’s like they are going back to being rice farmers again."

With as much criticism as China has taken, the world has to have China as a growth engine.  Otherwise our economies will be stagnant for some time.  You can almost see the advertising slogan now: "Buy Chinese!"

Jon C. Ogg
November 14, 2008