The Weak Spot in China's Economy

Focus: GLOBAL

The giant production engine that is China excels at making more and more stuff. But it's not good at slowing down, and when demand falls, that's a profit killer, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

Building infrastructure at breathtaking speed. Creating the world's factory. Stringing together quarter after quarter of 7%, 8%, 9%, and even 10% growth.

These are some of the strengths of China's economic system. And sometimes, as we watch the US and global economy struggle with the fallout from a financial crisis that started in the United States, or the economies of Europe sink again into recession, it can seem as if China's system has only strengths.

But no economic system is good at everything. And right now, China is delivering a painful lesson in exactly what its economic system is bad at.

China—and this should come as no surprise, given the history of other centrally controlled economies—is really, really bad at shrinking supply when demand falls. The current supply-side disaster is so bad, in fact, that the Chinese government has been obviously falsifying economic data to hide the extent of the problem.

And the extent of the problem is one reason I think that the People's Bank of China will move relatively soon to cut interest rates and step up its efforts to stimulate the Chinese economy.

Case in Point: The Auto Industry
The current obvious fakery is degrees of magnitude different from the usual distortion in Chinese economic data. For example, the Public Safety Bureau has simply stopped publishing data on new-car registrations, because the numbers show such a big drop in new-car sales that they simply can't be fudged.

Take a look at the auto industry as an example of China's supply-side problem.