At the Canton Fair recently we here that contracts signed were down 15.8 percent and into negative growth for the first time and this includes Machinery and Electronic goods trade which the world bank expects to continue growing. Wu Jianhai, a Wenzhou-born businessman pointed to the devaluation of the Euro as being a fatal strike on Chinese traders. Many companies have recently taken out big investment loans for expansion and new equipment and are struggling to pay debts, which hints at the involvement of vast investment fund flows that were going into China earlier in the year. When the likes of addidas shift production from China to Indonesia and Vietnam on volume declines causing a pricing tipping point, it does look like things may not be so rosy. Chinasavvy’s Devereux agrees that the downturn is likely to push up quality because China will shift from being a seller’s to a buyer’s market, which in turn should hasten the decline of the low-margin manufacturer. This is perhaps a more sobering thought as China begins to compete on much better terms with global companies and begins to steal market share in areas where they have been weak.

This week we hear China’s central bank drained 22 billion yuan via 28-day bond repurchase operations which caused the Yen to rise. This comes just after Paulson went to visit last week. In contrast Gao Xiqing in an interview with James Fallows who overseas 200 billion of China’s 2 trillion in dollar holdings says he is betting against the dollar. It is also interesting that he sees that long term, pulling out of dollar assets might not be a bad thing, but points out that because US markets are the most viable and predictable he sees opportunities. His ultimate view is that the US should tell their people that they need to save and come out with a long-term sustainable financial policy.

Non of what I am hearing bodes well for China in the short term or the US in the long term unless it accepts some painful adjustments.

It’s quite remarkable to see trade collapse without any active policy preventing it — encouraging trade, even! India’s on the boat now — even as shipping costs plunge and the same original misalignments remain.

It speaks volumes for the depths of this economic dislocation.