Thursday, October 23, 2008

Chinese factories are going bust

A sobering story in USA Today on China.

SHAOXING, China — In the good old days — oh, three months ago — Tao Shoulong would prowl the streets of this ancient city in his Mercedes-Benz. His wife and partner, Yan Qi, would cruise around in her Toyota Land Cruiser. Together, they would drink into the night with clients, suppliers and creditors, hatching plans to expand their Zhejiang River Dragon Textile Printing & Dyeing Co.

Tao built River Dragon from a start-up with four employees into one of China's biggest textile printing firms in just five years. He had even grander dreams: He wanted to see his company's stock trade on Nasdaq alongside the likes of Microsoft and Intel.

The dreams are dead. River Dragon shut down on Oct. 7. Tao and Yan have vanished, leaving behind more than $290 million in debt and a lot of anger in this city 140 miles south of Shanghai in the Yangtze River Delta. The company's demise put 4,000 workers on the street and jilted hundreds of suppliers and creditors.

The speedy rise — and speedier fall — of River Dragon is a depressingly familiar story in China these days. Thousands of Chinese factories have shuttered in the past year, done in by:

•An export-killing global slowdown that began with the collapse of the U.S. housing market and the ensuing financial crisis. Local textile merchant Fang Xingquan, a River Dragon creditor, is among many who believe a sharp drop-off in exports was a key factor in the company's demise....

The Chinese economy is absorbing another blow beyond crumbling exports: collapsing home prices. Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington, D.C., reckons a slowdown in construction could shave another 1 to 2 percentage points off China's economic growth.

http://www.usatoday.com/money/world/2008-10-21-red-dragon-china-factories-economy_N.htm?loc=interstitialskip

It's not just China. Japanese stocks are at four year lows in this Bloomberg article.
http://www.bloomberg.com/apps/news?pid=20601080&sid=a15JmwSujZKY&refer=asia

Four year lows? They are almost back to the lows in 1982! That is what a deflationary environment does to stock prices.

Deflation is like Humpty-Dumpty. Once prices start falling, it's pretty hard to put the pieces back:

Humpty Dumpty sat on a wall.
Humpty Dumpty had a great fall.
All the king's horses and all the king's men
Couldn't put Humpty together again.


And all the Fed's targeted programs to the banks won't put Humpty back together again!

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