China's Looming Problems Give New Government Biggest Test Yet

China has been integrating many capitalist principals into its communist government for sometime, but until now the new blended policies have really yet to be tested. Tim Iacono at The Mess That Greenspan Made takes a closer look at China's looming problems and discusses how their new government is in for its biggest test yet.

There's a very good story in the Washington Post today about the slowdown in China detailing the impact of the sharp decline in the export industry and all the steps being taken by the government to counter the slowdown.

Being in the unique position of have huge cash reserves, the Chinese government has begun applying these funds liberally in the hardest hit areas.

In a report yesterday, David Burton, Asia-Pacific director of the International Monetary Fund, noted the Chinese economy "will slow but should remain relatively strong and help to support the rest of Asia".

This morning, according to this story at 24/7 Wall Street, "Dark Star" Nouriel Roubini predicts the Chinese economy "will fall apart".

Which will it be? We'll find out soon enough. Here's the Post article:

For the first time in the 30 years since China began its capitalist transformation, there is a perception that the economy is in real trouble. And for the Communist Party, the crisis is not just an economic one, but a political one. The government's response offers a glimpse into its still ambiguous relationship with capitalism -- relatively hands-off in good times, but quick to intervene directly at the first signs of a downturn in order to prevent popular unrest.

In recent weeks, local governments have set up special loans for ailing companies and initiated severance payments for workers who have already lost their jobs. Officials are candid in acknowledging the efforts are needed to head off what they call "mass incidents" -- the Communist Party euphemism for protests.

The economic devastation has been worst in the industrial centers of southern China, areas that had thrived in recent decades by producing the electronics, clothing, toys and furniture that fill retail stores in the United States.

With export orders falling because of the global slowdown and rising raw material and labor costs, more than 68,000 small companies nationwide collapsed in the first half of 2008 and about 2.5 million jobs in the Pearl River Delta region may be lost by the end of the year, according to government and industry estimates.

As the economy has soured, dissatisfaction has grown: Since mid-October, there have been dozens of labor protests involving thousands of workers at major exporters, including several publicly listed companies.

It sounds like the combination of a communist government and a free market economy is about to face its biggest test yet.

This article has been reposted from The Mess That Greenspan Made. The full post can also be viewed on The Mess That Greenspan Made.