China's At-Risk Factories

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Then there are China's fragile banks, which could be hit by waves of defaulting loans as factories fold. Although Chinese banks during the current boom have been able to reduce their unusually high proportion of nonperforming loans carried on their books, declining corporate earnings will diminish borrowers' ability to repay their debts. While it's difficult to assess the overall exposure of banks to the manufacturing sector, it's easy to imagine lenders getting caught in a Chinese-style credit crisis if manufacturing contracts sharply.
Of course, worst-case scenarios don't always come true. Anderson, the UBS economist, isn't overly pessimistic. But he sees China's export growth rate falling from about 25% a year to single digits by mid-2008. "2008 will likely be the year manufacturers [are] finally forced to take a general hit on profitability," he says. A soft landing for factories might even be beneficial for the country in the long term, because it would weed out inefficient operators and boost China's productivity. A period of "creative destruction" is an inevitable part of any business cycle. China's economic policymakers can only hope that the creative aspects of the coming shakeout outweigh the destruction.
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