The Global China Bubble
China’s Slowdown Hits Germany

Slowly but steadily, we’re learning new details about China’s weak economic fundamentals: Some of China’s biggest companies are in peril of defaulting, according to the Financial Times. “Beijing knows,” writes the FT, “that with $15tn in corporate debts, equal to about 145 per cent of gross domestic product, any sustained wave of defaults would trigger a financial crisis.” Yet though Beijing has been injecting liquidity into the companies, the government appears to be floating the idea of letting some sputtering enterprises default.

Letting even a few of these companies fail could have grim, if unpredictable, effects on the domestic economy, particularly in the already beleaguered Liaoning province—known as China’s rustbelt. And the effects of China’s overall economic troubles don’t stop at its borders, either. The China slowdown is having a serious impact on the international economy. This is particularly true for emerging markets, but the WSJ reports that Germany, a developed country, is feeling the pinch too:

German exports to the U.S. and many other markets are still growing, cushioning the impact of China’s troubles. But with much of Europe still licking its wounds from the long eurozone debt crisis, business confidence in Germany is vulnerable to continued cooling in Asia.

“The overall situation in China is depressed,” said Ulrich Reifenhäuser, a management-board member at machinery maker Reifenhäuser Group in North Rhine-Westphalia. “I see very few orders in the near future.”

German exports to China fell by 4.3% from January through November, compared with 2014, the German statistics service said this month.

It isn’t just commodity exporters, that is, who are vulnerable to China’s slowdown. Makers of capital goods for China’s heavy industry are badly exposed to it, too.

China heavily over-invested in manufacturing capacity, projecting that super-hot growth would last forever. It never does, and now China has too much manufacturing capacity and its factories are either closing or churning out goods that people won’t buy at a price that covers costs. Chinese manufacturers have woken up to these realities, and they are scrambling to stay alive. That means they aren’t spending money on buying more equipment to make more stuff that they can’t sell. But Germany’s economic strength is heavily connected to its ability to make high-quality capital goods—machines that make other stuff. Germany’s export sector therefore needs a strong Chinese manufacturing sector, and the cutback in Chinese purchases of high-quality capital goods is hurting the German economy—and will continue to so for some time.

Conditions are going to be tough for quite a while. The manufacturing bubble in China (and globally) is huge, and the existing overcapacity will take years to be liquidated.

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