China’s economic difficulties are very worrying because in China an economic slowdown is not just an economic problem but a political problem. Will the Chinese leadership turn to nationalism to divert attention from problems at home? Interesting times. and this time that is a curse.
China needs to encourage domestic consumption and with a trillion dollars in reserves they have the funds. Spending the rainy day fund would benefit the U.S. as well, stimulating our exports. It may already be too late, however, to shift smoothly from export to domestic consumption which means that mass capital depreciation will occur as capital investments in export industries turn out to be worth less than first appeared.
I agree that China is the more interesting political and economic place in the world (weighted by influence, Bolivia is also fascinating but barely relevant). But I don’t think the switch from exports to domestic consumption will be that difficult. IIRC, exports contribution only about 1% to China’s GDP growth, with consumption and investment taking the majority.
I’m more worried about a sudden stop of investment, a slowdown in consumption, and the impact that this, combined with a decline in the processing trade, will have on the region.
The BRICs accounted for the lion’s share of world GDP growth, and China the bulk of that. As it goes, another source of contagion will follow.
The prospect of China encouraging domestic consumption is definitely NOT a net benefit to the US. Since an extremely large proportion of China’s savings is in USD-denominated assets, stimulative policy would require them to sell (or at least not buy as many) treasuries, agencies, mbs, etc. With the US government planning to ratchet up treasury issuance 2-fold and with the agencies looking to guarantee an even greater proportion of the mortgage market, we will need buyers IN SIZE. Only China and Japan can realistically bring that, so if they move to a stimulative policy I guarantee you that interest rates in the US will spiral out of control. This bearish result would clearly dwarf any marginal benefit to our exporters from increased Chinese consumption.
Let me know when we need to get back to listening to all the pundits who said China is a huge problem. Will that be before or after oil speculators?
Anything to get our mind off our own real problems.
Okay, tomorrow I’ll be in a better mood.
it is too late. 50% of steel and aluminium plants have been idled and we have already seen our first default in the steel sector (FerroChina). Most capex done in 06 and 07 was marginal or negative IRR and there is going to be a lot of capital overhang (like Anglo-Saxon world asset inflation overhang) that China is going to work out. Vis politics, no idea. No one in Beijing is telling me anything scary yet though only 12% of university graduates have found jobs recently.
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