It appears that China wants to maintain its previous 10% year-over-year growth, but that is actually unsustainable in the future. You see, for over 30 years China has had incredible growth in its GDP. However, as the economy grows larger and larger it cannot maintain that exponential growth rate. Rather than trying to hold onto a 10% per year growth rate, China should be looking in the neighborhood of 3 to 5% so they don’t overheat.

About 30% of China’s economy has been exports, and most of those have come to the United States. Without the US buying consumer buying at peak demand due to the global economic recession, much of their manufacturing base has been crushed. This has caused a huge crisis in their manufacturing sectors and manufacturing clusters. Right now, the commercial real estate market in Shanghai is under severe challenges, and could completely collapse.

Meanwhile, it appears that the Shanghai index is oversold, and the stocks are trading at over 75 times earnings, and yet, one has to wonder how many of those companies will actually be able to maintain the previous earnings based on the future prospects. The reality is that the United States could go back into a double dip recession, and consumers could be curtailed far off into the future (1 to 1.5 + years).

This means that China’s manufacturing base will not recover with any relative or immediate certainty, and since it was previously 30% of their economy this is a real problem for them. They’ve attempted to use stimulus money to bolster their economy, but they can’t do that forever. What may happen is China may be in a worse situation than the United States, even after China took advantage of our good will and free trade efforts.

What China needs to do is to regroup and forget about trying to maintain a 10% per year growth rate, and focus on between 3 to 5% over the next decade. They should also use interest rates, and allow for a little bit of adjusted inflation to meet those goals, and perhaps, surpass them in some years. China made an unfortunate error, and got too greedy too quickly, and it is coming back to bite them. This will be interesting to watch as the nation tries to regroup and figure it all out. Please consider all this.