China's transition from export-led growth to domestic-led growth might not be easy and could be disrupted by major social unrest. The sudden slowdown in China's exports - mostly attributable to the recession in Europe - is forcing China's leaders to scramble to boost domestic growth. Their immediate reaction over the past two years has been to raise minimum wages. That's crushing profit margins, which tend to be razor thin even when all is going well.

So now companies are scaling back their hiring. China's industrial production rose 9% year-over-year during August, but that's the slowest pace since May 2009. Railway freight traffic plunged 12.4% over the past four months through July to the slowest pace since February 2011. All these developments certainly explain why the Shanghai-Shenzhen 300 stock price index dropped Sept. 5 to the lowest reading since March 3, 2009. On Sept. 7, it rebounded by 5.3% on news that the government approved 25 new subway and intercity rail projects worth $126 billion.

That's not much, really. Why aren't China's leaders spending much more as they did in late 2008 and 2009 to boost economic growth? It might be because much of what they built was defective as a result of widespread corruption. The Aug. 4 issue of the London Times reported there were 99 road cave-ins in Beijing between July 21 and Aug. 21 of this year. Roads and bridges are collapsing in other cities as well. Most are relatively new, including a bridge that was built just 10 months ago.

Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.