Over the last three- and six-month periods, Chinese stock indexes have led a
global rally. China has outdone emerging markets broadly and left US indexes
well behind. The iShares FTSE/Xinhua China 25 Index has outperformed the
iShares MSCI Emerging Markets Index and the S&P 500. This does not fit
standard macroeconomic patterns, theory or intuition.
Leveraged industrial exporters and credit providers do not walk through the
blazing destructive fires of the present global economy without getting burned.
For 20 years, China has accelerated into the most rapid and sweeping
large-country industrial revolution we have ever seen. The changes are real. We
are seeing a transfer of industrial production from many locations.
Transnational firms from the US, the euro zone and Asia have
come for the infrastructure, wage rates, environmental policy, workers and
market. They have also come for the bubble.
It is very difficult to separate the bubble from the real economic revolution.
Both are clearly present. For the last four months it has been the bubble that
has been the dominant element in China perception and investment. The
China-centric emerging market bubble has led us up since February 2009.
For many years the US and China have shared a transnational economy. Chinese
lending and export are inextricably interwoven with US import and borrowing.
China is now the world's second-largest exporter and is responsible for 9% of
world trade. China is the largest source of manufactured imports for the US and
the European Union. The World Bank Global Economic Prospects 2009 joins the
Organization for Economic Cooperation and Development and other global
institutions in forecasting a 6% decline in world trade with particularly sharp
declines in the US, EU and manufactured goods trades.
China will be seriously and structurally influenced alongside her major trading
partners. China's growth rate fell to a reported 6.1% in 1Q 2009, its slowest
growth rate in 20 years. China's imports, exports and GDP growth have been
falling for six months. April and March 2009 exports were down double digits. A
22.6% decline in April marks a larger fall than the March 17% decline. Chinese
firms are growth plays with thin profit margins and huge export markets. These
markets require huge import growth and intense free trade policy from
importers. Export-driven Chinese growth and lending were part of the same debt
consumption system that has been imploding since spring 2007. This is not
discussed - it never is in bubbles. It is demonstrably true.
The International Monetary Fund April 2009 Global Financial Stability Report
details China as the world's largest exporter of capital in 2008 with 24.2%.
The same report details the US as the world's largest importer of capital, at
43.0%. According to US Census Bureau Foreign Trade Statistics for January and
February of 2009, the US ran a cumulative trade deficit of approximately $35
billion with China - the US's largest deficit trading partner. In January and
February of 2008, the US ran a cumulative trade deficit of $39 billion with
China, also our largest deficit trading partner across the first two months of
last year. In 2008-2009, our trade deficit with China declined by 10% for
January and February. In March 2009, US imports from China declined by $1.4
billion from March 2008.
China's Ministry of Commerce reports the US as the largest trade surplus
partner for all months with reported data for 2008. US exports to China were
$71.5 billion in 2008 and US imports were $338 billion. This produced a deficit
of $266 billion. We are on pace for a China trade deficit tens of billions less
this year, on the order of $205 billion to $225 billion.
Markets are now betting that we will import much less and China will lead us
back to growth through government stimulus, increased domestic consumer
spending and lending.
If any nation could pull of a deft transition from export industrialization to
domestic consumption, it would be China. Success will require years, good luck,
lower profits and lower growth. To move from global production with
transnational partners to domestic production is a sea change in an economy.
This means changing what, where, how and at what wages you produce.
For China such a radical transition means much higher wages, different
products, marketing and sales. The Chinese economy produces world and export
commodities with imported basic commodities and compulsively invests to grow
capacity. This will not return revenue growth for the next few years. Recent
growth is dependent on huge trade surpluses and lending vast sums to sustain
unsustainable, imbalanced exports. This will be increasingly difficult as
political pressures mount in China and her export markets. Selling at home
means different production methods, wage structures and lower profits. Even if
this works, the equity bounce in China has come several years too early.
China's economic relations with the EU, its largest trading partner last year,
are similar to those with the US. In 2008, the EU exported approximately $104
billion in goods to China and imported $330 billion in goods from China. There
is massive and rising concern in the euro-zone about the size of the deficit
and market access for European firms. The euro area is deep into a serious
recession. Likewise, South Korea, Japan, Russia - all of which are China's
major trade partners - are all in deep structural recession.
Approximately 45% of China's exports go to the US and EU. Exports to the US and
EU comprise over 15% of Chinese 2008 gross domestic product at official GDP and
exchange rate. A third of Chinese GDP is derived from exports. All major
trading partners are presently contracting. That is why we hear so much about
their stimulus plan and domestic demand.
We are expecting to see a 20-year growth bonanza based on one economic model
seamlessly transition to a different national economic model in six months,
with no business cycle point below 6% annual growth. Like American home prices,
Chinese growth is always positive.
None of this is to doubt the power and transformation of China. It has arrived
as a global power and will continue to do so over decades to come. China has
not triumphed over the business cycle. No one ever has and no one ever will. As
her imports fall, her energy consumption and generation declines and her
shipping tonnage falls - China is struggling.
Middle Kingdom investments are a growth play in a global economy without
growth. China has arrived and will suffer as the rest of the global economy
suffers. Ironically, it is the weakness that shows that China has arrived. The
recent meteoric rise of her shares and indexes is simply the latest in a long
string of bubbles. As emerging markets and China have led up lately, it seems
increasingly likely they will lead the way down.
Max Fraad Wolff is a doctoral candidate in economics at the University of
Massachusetts, Amherst, and editor of the website GlobalMacroScope.