It has been one globe economically, a global village, for decades now
The war among major economies is no longer fought on the seas, or on land with massive armies, but in board rooms and markets.
That China is a communist state politically is no longer a concern. The competition is economic, for instance whether China’s semi-capitalistic economy, having already surpassed the great France and Germany, will soon surpass Japan to become the second largest economy behind the United States.
The concern in the US is not which country has the largest navy or nuclear arsenal, but whether China, Japan, and the oil exporting nations, will continue to buy US treasuries, and hold the dollars in their central bank reserves, happy to be the largest foreign holders of US debt issues.
The global village aspect and their economic dependence on each other can be seen in the way global economies enter and exit recessions and depressions together, and see their stock markets enter and exit bull and bear markets together.
It is not shocking that the economic worries blowing over Europe this year have circled the globe, including the emerging markets. Chilly winds blowing in China haven’t attracted as much attention yet, but may soon turn into unforgiving storms.
That China’s economy has been growing at an astounding pace for years has not escaped the attention of global investors.
The country's stock market gained 500 per cent from its low in 2005 to its high in late 2007. It then plunged 74 per cent in the global bear market of 2007-2009. And subsequently surged 109 per cent in the new bull market (while the US market gained ‘only’ 82 per cent to its recent peak).
However, there hasn’t been much recognition that the Chinese share stopped out again last July, and has now declined around 28 per cent, officially into another bear market, even as its economy remains one of the strongest.
Stock markets typically look ahead six to eight months and react now to what they expect economies to be six to eight months in the future. Is China’s stock market forecasting trouble ahead for the Chinese economic system?
That’s a relevant question given how important China’s booming economy has been to still fragile global economic recoveries.
Prosperous Chinese consumers are consuming in the exports of other countries at such a fast pace that China’s imports at the end of March were 65 per cent higher than a year ago. (China’s had the largest trade deficit in over six years.)
So, what seems to be the potential problem that has had the Chinese stocks unable to stand since July 2009, well before the debt crisis in Europe popped up?
It is seeming probable that real estate in China has developed a bubble, and the stock markets very well know what bursting real estate bubbles do to economies. Real estate prices in the Dragon’s land have been rising sharply for several years and soared at a record pace in March, up an average of almost 12 per cent, but more than 50% in some overheated cities, from a year earlier.
Their government is obviously worried, and trying to let the air out of the balloon in a very controlled manner. It has raised the amount of reserves its banking system must hold, thus discouraging excessive lending, raised mortgage rates and the size of required down-payments. Most dramatically it is now requiring 35-40% down payments on second homes in an effort to stop the rampant ‘flipping’ of realty for fast profits by speculators.
We have also seen lately that Large global investors like BlackRock, the mammoth New York mutual fund group, and Boston’s State Street Global Advisors, are among the sellers of Chinese stocks, BlackRock indicating it believes China’s economic growth has peaked, that the efforts of the Chinese government to cool off its realty will have a negative effect on the overall Chinese economy. The yield spread on $350 million of 13.5 per cent notes sold by Shenzhen-based Kaisa last month widened the most of the nine issues, expanding to 16.52 per centage points from 11.07 per centage points. China property developers paid coupons as high as 14 per cent to issue dollar debt this year, compared with an average 9.2 per cent for other companies in Asia and 6.2 per cent for US property companies. On average, Chinese property companies are paying a 10.875 per cent coupon.
A booming realty market has an amazing effect on economies, creating jobs and business for all manner of supporting industries across all spectrums like producers of construction, electrical, and plumbing materials, furniture and appliance manufacturers etc. Letting air out of the real estate bubble in China is definitely crucial , but it surely raises a lot of questions on China’s overall economy, which is now more than important to fragile global economic recoveries.
China’s situation at present quite resembles Japanese situation in the late 1980s, when authorities, reacting to the export slump due to the upward revaluation of the yen after the 1985 Plaza Accord, adopted a very low interest rate regime in order to boost domestic demand – and thereby created the conditions that led to an economic bubble. The question arises whether the Chinese economy, and its realty market in particular, is at risk for a similar asset bubble.
Additionally, over the last 14 years, China’s economy has grown a whopping eight-fold, to $4.9 trillion, and it has quickly soared to become the world’s third-largest economy.During the same period, the US economy has only doubled in size.As far as currencies are concerned, the dramatic outperformance of the Chinese economy relative to the US economy would normally be reflected in a much stronger Chinese currency.
But China controls the value of its currency. They allowed it to strengthen only 18 per cent during those 14 years — a mere drop in the bucket, keeping the advantage squarely in China’s court. Moreover, since the financial crisis and global recession kicked in two years ago, China has returned to a peg against the dollar, artificially keeping its goods cheap for a weaker US consumer and undercutting its export-centric competitors. Here’s the problem: The global trade imbalance driven by China’s cheap currency is a recipe for more frequent boom and bust cycles.
The economic tornados in the great Europe are more than enough potential problems to keep global investors busy, but the economic clouds potentially forming on the Great Wall of China also need to be carefully watched , which could ultimately slowdown the growth rate to 7-8 per cent.
Are the Great Bulls listening?
The author is CEO, India Forex Advisors
