- What happens in China this year will be more important than what happens here. Change here will come from there.
- China’s problem now: neither it nor the outside world needs another 50 percent of China GDP in infrastructure or production.
News about China’s economy over the past few days hasn’t exactly been comforting. Yesterday, Forbes reported that the country’s gross domestic product (GDP) grew about 1 percent in 2015.
So what should you know about these shifts and the future of Chinese investment?
1. It is okay to mention China to clients — they are already thinking about it, and if you read the following, you’ll know more than they do and will be able to bring calm and comfort to them.
2. What happens in China this year will be more important than what happens here. Change here will come from there.
3. To have events here driven by events there does not mean that we are weak or losers. In 1945 at the end of World War II, the United States was the most powerful nation there has ever been — so powerful that the rest of the world (most of it in ruins then) was certain to rise again to compete with us.
4. China in the last 25 years grew its economy in a way no other nation ever has. However, it did so with titanic investments in physical infrastructure and productive capacity — at least 50 percent of GDP each year, consumers only 40 percent, a little more than half the U.S. fraction.
China’s problem now: neither it nor the outside world needs another 50 percent of China GDP in infrastructure or production.
[graphiq id=”hdGN6irtQjP” title=”Chinese GDP Growth Over Time” width=”600″ height=”403″ url=”https://w.graphiq.com/w/hdGN6irtQjP” link=”http://country-facts.findthedata.com/l/12/China” link_text=”Chinese GDP Growth Over Time | FindTheData”]
5. All of that investment was funded by debt, although debt in China is closer to government spending than U.S. IOUs. China invested so fast, and so much of its investment was politically driven (State Owned Enterprises, “SOEs”) that a lot of it is non-productive and can’t pay back its debt, or anti-productive and drowning the outside world in Chinese exports.
6. China’s stock market — and ours, and everyone’s — is symptom, not cause. Stock markets lurch all over the place, often for no particular reason. But when they lurch one way for long, look for the reason.
7. Almost two years ago, China began “rebalancing” to modernize its economy from excessive investment to market-based and consumer-led. Every effort has failed, often leaving things worse than they were before.
Censorship and state security police are not compatible with free-flowing innovation, and the owners and managers of SOEs are not about to let go of their rice bowls.
8. Innovation failing, investment and new debt trimmed, China has to do something to keep the whole crazy machine going. The Party holds power because it provides stability. If the U.S. had China’s history, we would give up many civil freedoms in exchange for stability. But if China enters instability, so will support for the Party.
Quietly, this is already happening, in the form of successful Chinese getting their money out of China (mostly illegally) at the rate of $100 billion per month.
9. What is China to do? Push exports, use the money to make up for the economic slowdown and capital flight.
But China has already pushed its exports. To push more, devalue the yuan and make Chinese exports cheaper to the outside world. The process of devaluation has been very clumsy (better just to get devaluation done; fibbing makes it worse) and was the trigger for the break in China stocks, and now global ones. China dumping more cheap exports on the world makes it difficult for anyone else to make a living.
10. The good news for us: nothing matters more for U.S. interest rates than low inflation and low rates. Thank you, China. Oil matters, but not as much as China. Otherwise, the Fed might do something awful to us.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
