The China Syndrome Bites Back

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The China Syndrome Bites Back

The China Syndrome Bites Back

Submitted by Julian Darley on November 17, 2008 - 12:30pm.

Just 12 days before the Three Mile Island nuclear reactor disaster,
in March 1979, a movie called 'The China Syndrome' was released. The
title comes from the idea that if the core of an atomic reactor
melted down, it would burn its way through to China. Thanks in part
to the accident, the film became a blockbuster.

29 years later, America has triggered a global financial meltdown,
from which China thought for a while that it might be immune. Not
so. What did not happen in the film, is happening to the real-life
economy of China. Factories are closing at astonishing rates,
including in the Pearl River Delta - "the factory floor of the
world," and whole areas of business, such as scrap metal, are
contracting or collapsing.

In Guangdong province, the engine of China's export economy, the
rate of annual export growth has slowed from 22.3% to 13.5%, and the
overall economy has slowed to 8%, setting alarm bells ringing in
Beijing. Of course, any western economy would be grateful for any
growth at all, but China's economy really needs to grow at double
digit rates to stave off serious social unrest.

Thus the fact that the US meltdown has now flowed into China is
potentially disastrous for this most populous nation, but as its
exports shrink and its factories shut, the meltdown is starting to
flow back to America again, making an ugly situation even worse.
This vicious cycle is playing out in interconnected ways. Reduced
Chinese exports to the US mean that the Chinese have less foreign
currency to lend back to America, which further exacerbates the
credit crisis and tends to tighten the money supply, making it more
difficult for Americans to buy Chinese exports (or anything else).
The reaction of the Chinese is to encourage the development of a
free-spending consumer economy at the very time when that system is
failing and being seriously questioned in the West. At least two
observations, with far reaching consequences can be made.

One: China has subsidized its economic development by destroying its
environment on an unparalleled scale and this will start to
compromise its ability to keep growing fast, even without the
looming global economic depression. The Chinese leadership appear to
know this and show signs of being very worried. China has in many
ways become the eastern anchor of globalization, and yanking it up,
will cause even more global economic destabilization.

Two: a lot of the Chinese manufacturing export channels that have
been built up so fast are collapsing, and some will not return soon
or at all. Where the Chinese have been making absolutely vital goods
for the West, there will be real pain until alternatives supply
chains are rebuilt more locally. This will be no easy task in this
climate of frightened and constrained capital. In many respects, it
will require the rebuilding of the American and British
manufacturing economies (less so the European), along with the
supply chains to feed it and the return of the knowledge and skills
to recreate it and run it.

It is hard to see how this can happen without massive government
intervention, particularly from the US. Let us hope that President-
Elect Obama wants Americans to start making vital goods once again.
Otherwise, the world might find out the hard way that meltdowns
happen and they flow both ways.

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Posts: 3998
Re: The China Syndrome Bites Back

Chinese Automakers May Buy GM and Chrysler

By Bertel Schmitt
November 18, 2008 - 28,623 views

Chinese carmakers SAIC and Dongfeng have plans to acquire GM and
Chrysler, China's 21st Century Business Herald reports today. [A
National Enquirer the paper is not. It is one of China's leading
business newspapers, with a daily readership over three million.] The
paper cites a senior official of China's Ministry of Industry and
Information Technology– the state regulator of China's auto industry–
who dropped the hint that "the auto manufacturing giants in China,
such as Shanghai Automotive Industry Corporation (SAIC) and Dongfeng
Motor Corporation, have the capability and intention to buy some
assets of the two crisis-plagued American automakers." These hints
arevery often followed with quick action in the Middle Kingdom. The
hints were dropped just a few days after the same Chinese government gave
its auto makers the go-ahead to invest abroad. And why would they do

A take-over of a large overseas auto maker would fit perfectly into
China's plans. As reported before, China has realized that its export
chances are slim without unfettered access to foreign technology. The
brand cachet of Chinese cars abroad is, shall we say, challenged. The
Chinese could easily export Made-in-China VWs, Toyotas, Buicks. If
their joint venture partner would let them. The solution: Buy the
joint venture partner. Especially, when he's in deep trouble.

At current market valuations (GM is worth less than Mattel) the
Chinese government can afford to buy GM with petty cash. Even a
hundred billion $ would barely dent China's more than $2t in currency
reserves. For nobody in the world would buying GM and (while they are
at it) Chrysler make more sense than for the Chinese. Overlap? What
overlap? They would gain instant access to the world's markets with
accepted brands, and proven technology.

21st Century Business Herald, obviously with input from higher-up,
writes that Chinese industry must change and upgrade. China wants
their factories to change from low-value-added manufacturing to
technically innovative and financially-sound high-value-add
industries. Says the paper: "It would be much easier now for strong
Chinese automakers to go global by acquiring some assets of their
U.S. counterparts in times of crisis."

Deloitte & Touche sees a trend: "Chinese automakers can start with
buying out the OEM projects and Chinese ventures of some global
carmakers such as GM and Chrysler."

The Chinese appear to have bigger plans than an accounting firm can
imagine. 21st Century Business Herald acts and writes as if its
already a done deal, and the beginning of more to come. "In the
coming two years China is likely to see a few of its large Chinese
automakers and other manufacturing enterprises set a precedent for achieving
globalization by acquiring global companies, just like SAIC or
Dongfeng's possible acquisition of troubled GM or Chrysler."

Just in case you missed it, the Shanghai Automotive Industry
Corporation (SAIC) is China's largest auto manufacturer. In 1984, the
company entered a joint venture with Volkswagen. A decade later, SAIC
entered a joint venture with General Motors. In 2007, SAIC bought the
Nanjing Automobile Corporation, which had acquired British MG Rover
in 2005.

Dongfeng Motor Corporation is a public company, although 70 percent
of their shares are reported to be in government hands. They also are
one of China's Big Three. The company has numerous joint venture
partners, such as Nissan, Peugeot-Citroen, Honda, and Kia. Dongfeng (which
means "East Wind") was founded at the behest of Mao Zedong himself in 1968.

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