The specter of a Chinese recession
????A new report by the World Bank says China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making life easier for entrepreneurs.
????The report, titled "China 2030, " whose contents were first reported in the Wall Street Journal, warns that growth could slow rapidly and abruptly. It cites a recently identified phenomenon that economists call the "middle-income trap," in which rapidly growing economies slow down significantly when their per capita incomes reach around $17,000 a year. The phenomenon has been observed in Greece and Ireland, among other countries, and some analysts say China could fall victim by 2015.
????The report also sees a crossroads ahead for China's state-owned companies, which dominate the economy. Left to grow unchecked, they could put a damper on competition and squeeze out the spread of free-market entrepreneurism. Auto companies know all about this. China requires that Western manufacturers establish joint ventures with Chinese companies, and some of the most prominent are state-owned.
????In one of the most successful such arrangements, GM is locked into long-term partnerships with the state-owned Shanghai Automotive Industry Corporation (SAIC) that have spread even beyond China's borders. Shanghai-GM has a 9% share of the China passenger car market, while Shanghai-GM-Wuling sells more than a million small trucks and vans in China. Yet another partnership between the two companies has been formed to expand into India and Southeast Asia. As Asia-based analyst Michael Dunne has wisely observed, "SAIC has its fingers in everything GM does in China."
????GM's relationship with SAIC has been tangled lately. The U.S. automaker sold a 1% interest in its primary joint venture to its partner in 2009 during the heat of the bankruptcy crisis, giving SAIC a 51% controlling interest. Lately GM has been trying to reacquire that 1% to restore the balance to an even 50-50 split, and negotiations are said to be proceeding amicably, but who knows? Given the current state of sales, politics, the economy, and industrial policy, predicting the future in China right now seems especially hazardous.
