Why China Can’t Save Us
De-coupling lives again, but I wouldn’t bet the farm on it.
Remember when it made the rounds over a year ago?
The idea was, even if the U.S. economy caught pneumonia, the rest of the world would at worst get a bad cough.
It was argued that Europe and China were much less reliant on the U.S. economy than ever before. And China, with its massive import needs, would also keep economies from Brazil to Australia humming.
The theory gave governments, businesses and investors hope. It was about as good as any other unproven theory. But it didn’t quite work out, did it?
America’s economic malaise quickly spread to other countries and they caught much worse than just a cough.
When Europe also began to cut back spending and China’s export-driven economy was deprived of both of its major markets, its factories reduced production and then laid off millions of workers.
Looking back, it’s easy to see how seductive de-coupling was. If true, it meant that the good times were not going to come to an end. The economic slowdown would be mere hiccup.
But the perma-bulls who fell for it and stayed in the market were rewarded with massive losses.
Now the same theory is back, in the guise of “de-coupling 2.0.” And it’s just as stupid and silly, and unrealistically optimistic as de-coupling 1.0.
But that hasn’t stopped it from gaining currency.
The Economist recently ran a piece on it. Their only qualification? De-coupling will bring temporary relief, not sustained prosperity.
While spending some time in Cape Town recently, I read the same thing on the front page of the Cape News. Asia will recover first. Africa should look to the east.
Many of the same people who were pushing China’s ability to continue its double-digit growth a year ago are now saying that China can lead the world back to economic health.
Why the heck are people falling for this theory again? You know the old saying. “Once fooled, shame on you. Twice fooled, shame on me.”
For one thing, what they’re saying about China is basically true…
• China’s massive economic stimulus has stabilized growth and resurrected imports.
• China has found other trading partners to pick up the slack
• China’s imports of raw materials has gone up
• And China’s gusher of loans for “shovel-ready” projects has created jobs and given new life to many companies.
But these positive developments miss the big picture.
China’s economic growth may have stabilized, but it is now in the 6-7.5 percent range. It’s a far cry from the 11-12 percent growth China was experiencing pre-crisis.
And while China’s paroxysm of loans contrasts sharply to banks here sitting on their mountains of money and still afraid to lend, you shouldn’t dismiss a colossal downside…
Frivolous projects are also getting funded. This is something the Chinese press doesn’t like to talk about. But evidence is leaking out that huge sums of money have been squandered on useless and non-productive projects.
What’s more, hundreds of factories remain shuttered. At the beginning of the year millions of jobless ex-factory workers returned to their home villages to celebrate the Chinese New Year. They should’ve stayed there. But the countryside is even poorer than the hard-hit urban areas. So most flooded back to the cities where, alas, no jobs awaited them.
This looms as a huge problem for the Chinese government as the 20th anniversary of the Tiananmen Square massacre approaches on June 4. But it pales against the need to find jobs for more than 10 million or so students who graduate from China’s universities every year.
China is importing more now thanks to its stimulus package. But much of that was trying to capture low prices before they turned up (which they did). Let’s see if imports continue to rise post-stimulus program.
And here’s something nobody is talking about…
China suffered its worst drought in decades a few months ago. Rice production was hit hard. China will have to import large amounts of rice this year. Sure it can afford to. But it’ll drive up the price of rice and make it tougher for out-of-work Chinese to keep their rice bowls full.
It’s another sign that this is shaping up as a very tough year for China.
Fact is, replacing the United States’ massive market is easier said than done. China’s quickest road to recovery is helping the U.S. recover. That’s why despite a lot of moaning and groaning China will continue to finance our growing debt and take their chances on a future devalued dollar.
China’s leaders understand better than most people in America that their heady economic growth was entirely dependent on our “borrow-and-spend” behavior.
With no replacement in sight, it’ll be next-to-impossible for China to turn around its economy. De-coupling has once again miscast China. China is no savior. The crisis began in the west and will end in the west. Only then will a recovery spread elsewhere.
Read my lips: A rescue is not around the corner. You should continue to invest defensively (like in gold, for example) or bet the market short because it still has another leg down to go.
