The special thing about China is that the domestic market and domestic consumption are now driving economic growth, whereas the years from, for example, 1998 to 2005 were driven by excessive investment, FDI and foreign trade. Moreover, this growth is being driven by a long term but significant diversification of the economy towards the service sector and private small and medium enterprises (SMEs).

The high end property market is diving, particularly in Shanghai and Shenzhen. Yet this is, given the recent bubble, probably a good thing, and and is attributable to excessive costs, affordability, credit restrictions, and recent measures to stop imported speculation on RMB-based assets. It is also a result of the deliberate Chinese Central Government/People’s Bank of China credit squeeze to slow the economy, control speculative property development, and reduce tenseness in labour and supplies which are causing inflationary pressures. Similarly, the construction industry overall is slowing down, rather than declining.

Labour-intensive employment is experiencing restrictions, mostly due to supply constraints, migration, institutional impediments and a more discerning labour force seeking better conditions and higher costs. This has led to up to 30% of Guangdong factories experiencing labour difficulties, with many closing amidst mounting costs. What you have to look at is how many are shifting location inland or to another city, or amalgamating or rationalizing in response to these changes. Hopefully, for both environmental and congestion reasons, the auto industry will also slow.

Yet these, under the present tense economic, credit and supply circumstances can all be seen as economically positive factors, rather than negatives.

In contrast, the banking arguments that SocGen has raised are bizarre, and sound illegal. This might be what the China Banking Regulatory Commission’s President Liu Mingkang made reference to (in respect to cracking down on illegal lending activities) at last weekend’s World Economic Forum in Tianjin. Moreover, the SocGen arguments just don’t match reality, and forget the seminal importance of the black credit market. More than 70% of small and medium enterprises, the driving force in China’s economy, operate outside the banking system, a practice that is tolerated by the PBOC.

Dumping your shares of banks exposed to the Far East might be the right thing for one’s individual investment strategy or risk appetite. But it shouldn’t be based on the flawed, scare-mongering claptrap that came out of this SocGen report.