China’s Return to Normal

The stock market watches Europe with intent hesitation.  Up one day.  Down the next.  One day Europe’s on the verge of financial meltdown and stocks are in the cellar.  The next day rumors of a big bailout have markets floating above the clouds.

Clearly, the market hasn’t got a clue what to make of it…and neither do we.  So rather than trying to solve the whole ball of wax, today we’ll scratch for perspective…

When it comes down to it pondering the “if” and “when” of a Greek default is a great big distraction.  No doubt, it feels like markets could crash at any moment.  But whether they crash tomorrow or next year really doesn’t change the simple fact that the economy’s on the ropes and everyone knows it.  Moreover, there ain’t a darn thing anyone can do about it.

On Tuesday, for example, the Conference Board reported that consumer confidence in September remained near a two year low at 45.2.  We also learned on Tuesday that, according to the Case-Shiller index, property values fell 4.1 percent over the 12 months ending in July 2011.  On Wednesday, Federal Reserve Chairman Ben Bernanke said that long term unemployment is a national crisis.  Then, yesterday, we learned the economy grew at an annual rate of less than 1 percent during the first six months of the year.

Should it be any surprise that consumers are pessimistic?  They look around them and see a dearth of well-paying jobs, an economy drowning in a red sea of government debt, and a class of clowns in Washington that excels in making all the wrong choices.  On top of that, each night they fall asleep in a house that’s worth less than they paid for it.

But that’s not all…

Dr. Copper and Bad Chinese Debt

Dr. Copper – the metal with a PhD in economics – is always the first to know which way the economy will go.  Copper’s broad use in industry makes it a good early indicator of economic activity.

When copper prices rise, economic activity soon often increases.  When copper prices fall the economy often then stagnates.  On Wednesday, copper fell to its lowest close in 14 months.

From what we gather, the price of copper is falling because, after a decade long uphill sprint, China may be finally taking a rest.  In fact, Chinese copper imports have fallen 27 percent over the last year.  But isn’t China supposed to be the new economic engine of the world that’ll keep on revving and save the world from a global depression?

Unfortunately, China’s boom may have expanded on a bubble of bad debt that makes U.S. banks appear sound and disciplined.  Last week, fund manager and China bear, Jim Chanos, told Bloomberg the following…

“A lot of people are assuming that half of all new loans in China are going to go bad.  In fact, the Chinese government even said that last year relating to the local governments.  If we assume that China will grow total credit this year between 30 percent to 40 percent of GDP, and half of that debt will go bad, that is 15 percent to 20 percent.  Say the recoveries on that are 50 percent.  That means that China, on an after write off basis, may not be growing at all.  It may be having to simply write off some of this stuff in the future so its 9 percent growth may be zero.”

China’s Return to Normal

Here at the Economic Prism we’ve never been to China, we haven’t validated Chanos’ claims, nor do we pretend to be an expert on the country’s economy.  Still, the prospect that China’s miracle boom may be headed for an epic bust is something even the most casual observer can’t ignore.

Last night, for instance, it was reported that China’s manufacturing sector shrank for the third month in a row in September.  The world may have finally reached total saturation of Made in China goods.  Additionally, Chinese stocks have fallen to a 14-month low…down 16 percent in the last year.

Nonetheless, it certainly seems that China will have the largest economy in the world sometime in the next decade or two.  Unless the United States’ economy begins growing by leaps and bounds or China’s economy completely falls apart, it is just a matter of simple mathematics that China’s economy will soon leap up and over the top of the global heap.

In the grand scheme of things, this is just a return to normal.  According to Henry Kissinger, “China produced a greater share of total world GDP than any Western society in eighteen of the last twenty centuries.”

Obviously, it was the last two centuries where China slipped.  In the 19th century, the industrial revolution pushed Great Britain and later the United States to the top.  China then spent a good part of the 20th century experimenting with forced communal living at a national level.  Yet now they are rapidly catching up…and will soon reclaim their position at the top of world economic dominance.

But first they will have to go broke like the rest of us.

Sincerely,

MN Gordon
for Economic Prism

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