Dragon is feeling the heat

Letter from Shanghai

Only one China topic rates at the moment: is the credit crunch biting the dragon and, if so, which bits? In that air of expectant schadenfreude usually reserved for wealthy bankers about to spend more time with their families, everyone is interested.

Growth has slowed considerably. While still in high single digits, it will not stop unemployment rising. Government is pumping even more money into capital projects but business is hurting - particularly small factories in the south supplying export markets. It will get worse.

And Shanghai? As at many times in China's turbulent history, Shanghai has managed to insulate itself from some of the nation's problems. Pictures of Shanghai in the Thirties with Westerners in evening dress watching a bloody war being fought on the next block will be familiar to many. In economic terms, the same pictures might apply today, except the dinner jackets would be worn by Chinese businessmen watching events in wider China.

Factories in Shanghai are closing. But the workers losing their jobs are from rural areas. Most are not Shanghainese. More importantly, as Hong Kong did in the 1970s, Shanghai has already moved much of its small-scale manufacturing out of town. What's left is large and powerful.

But all is not rosy. Graduates cannot find jobs as businesses cut back on recruitment. Stock-market turnover and housing deals are well down. Middle-aged ladies who used to spend all day glued to a computer screen churning their portfolios have returned to cooking. They are sitting on their shares as others are sitting on their property portfolios. They will be back but not for a while.

As one Shanghainese friend put it: "We can cut back on things. We've done it in the past. And whatever happens, it can't be worse than the Cultural Revolution."

* Last week saw a massive 1.08% cut in interest rates by the central bank. It produced a bounce in the stock market that turned out to be another dead cat. It may have more impact on the housing market but, with inflation set to fall and jobs uncertain, it is unlikely to convince the Chinese saver to start spending.

* Meanwhile, across the river things are happening at the airport. China Eastern Airline's shares were suspended on Thursday. Prelude to an expected capital injection from government, it may also signal the start of long-awaited consolidation in the industry. Stablemate Shanghai Airlines will be watching keenly.