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Can China Save the World Economy?

Economics / China Economy Jun 14, 2010 - 03:16 PM GMT

By: Graham_Summers

Economics

Best Financial Markets Analysis ArticleNope. No chance.

For starters, let’s look at the basic numbers. China’s GDP is now $4.3 trillion, making it the fourth largest economy in the world. However, there’s a HUGE drop off from the first two economies (Europe $16.4 trillion and the US $14.2 trillion) to the third and fourth (Japan $5.0 trillion and China $4.3 trillion). 


As an aside, YES I know that Europe’s economy, and the US’s for that matter, is a disaster. But for now, let’s just focus on China’s role in the world.

Based strictly on plain GDP numbers, the idea that China could somehow pull the Europe and the US’s economies (let alone the rest of the world) into growth is ridiculous. China’s GDP is less than one sixth of the two largest economies’ combined GDPs.  The idea that this country could somehow grow so rapidly as to move the other two economies is like saying that one leg from the knee down could take your entire body for a walk.

It just ain’t gonna happen.

But let’s ignore this for now and take a look at China’s “incredible” GDP growth in 2009: the year the whole world proclaimed that China would lead us out of recession.

China’s stimulus program for that year was $586 billion. That’s the equivalent of 13% of China’s GDP. In plain terms, that’s HECK of a lot of money thrown at the economy. It’d be like the US throwing $1.86 trillion at its economy (more than twice what we did).

Remember, China measures GDP in terms of production, not sales or revenue generated. So if they build a $1 billion skyscraper that no one rents, it counts as $1 billion in GDP growth. With this in mind, is it any wonder that China’s 2009 GDP numbers were incredible? Think about the impact that $586 billion stimulus package had on China’s economy. Just the stimulus alone could account for 10% GDP growth (again, $586 billion out of $4.3 trillion is 13%).

But let’s assume not all of China’s stimulus went straight to GDP. So where did the GDP growth come from? Well, 36% of China’s economy is based on exports. But with  its largest trading partner (the US accounts for 17% of Chinese export trade) NOT in economic recovery (unless you count imaginary jobs and accounting BS as economic growth), it’s tough to stomach China’s “miracle” growth coming from that.

What about domestic demand? Isn’t China shifting its economy away from exports and into domestic consumption? Yes it is. However, the average Chinese worker makes $5-6K per YEAR. The idea that these folks will start loading up on Big Macs and Starbucks’ lattes is ridiculous. Yes, I realize that Big Macs cost $2 in China vs. $4 in the US. But that’s only a 50% price difference for an economy in which the average person earns 1/10th as much as the average US worker. And don’t Chinese workers save 20% of their incomes? That means only $4-4.8K in disposable income, much of which goes to rent and food.

Again, how are you going to get miracle GDP growth out of that?

Finally, and this is a bit of an umbrella argument (one that encompasses everything), China is a centrally controlled, state-run economy. I know, that many commentators like to proclaim China as the ultimate Mecca of capitalism, but the facts are that state-owned enterprises (SOEs) control over 50% of ALL industrial assets in China and account for 30% of Chinese GDP. Again, China remains a state-run economy.

In a state-run economy, when the government says to do something, you do it. Case in point, when the Chinese government told state-owned banks to start lending, they did in a BIG WAY (unlike in the US where we funnel $ trillions into banks, ask them to lend, and then sit and watch them pass out this money to their employees in record bonuses).

 Given that China is posting incredible GDP growth despite all rational explanations indicating it should be showing an economy slowdown, what are the odds that China’s economic numbers are a little “massaged”?

I’d say pretty high.

Good Investing!

Graham Summers

http://gainspainscapital.com

PS. If you’re worried about the future of the stock market, I highly suggest you download my FREE Special Report detailing SEVERAL investments that could shelter your portfolio from any future collapse. Pick up your FREE copy of The Financial Crisis “Round Two” Survival Kit, today at: http://www.gainspainscapital.com/MARKETING/roundtwo.html

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

© 2010 Copyright Graham Summers - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Graham Summers Archive

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Comments

Ben Gee
15 Jun 10, 10:45
China and the world

China is not strong enough to save the world. But if China falls, it will take many economies along. If China's export falls, look for Japan, S Korea, Taiwan, Austrlia and many countries in Africa to fall and there may be a domino effect.

If the US suceed in killing China's export, be prepare to accept a world recession or even depression.



15 Jun 10, 14:40
depression

@Ben Gee

Sort of like the depression the US now has from the loss of jobs of all types to Eastern countries? What goes around comes around.


Shelby Moore (author of "End Game, Gold Investors Destroyed")
17 Jun 10, 17:19
China asset bubble bullish for silver?

No one knows when it will crash, could go on for some years possibly:

http://www.youtube.com/watch?v=99HNFCn5RP8

1) Law of diminishing returns (I had figured this out in prior posts), given that China is spending > 33% of GDP on fixed assets (which doesn't account for depreciation and maintenance).

2) 12.5% of GDP stimulost, does not account for the multiplier effect of the massive increase in fractional reserve lending by the banks (which did not occur in USA stimulost).

3) The concept that China is a land of savers is false (for example saving as being an owner of a condo in an empty building, or more generally the point of #1, where savings is overconcentrating in fixed assets).

Debate:

http://www.youtube.com/watch?v=_J4g-H--5yg

http://www.youtube.com/watch?v=lcqciLe8oV0&NR=1

I found this debate very informed and fascinating! Looks like we may get a busting of the China real estate bubble, followed on by a 5 year plan to stimulate sales of household durables! Can any one say "BUY SILVER"!! Yeah! The central managers will just keep creating 5 year bubbles and popping them along the way, trying to "pretend and extend". Eventually (many years or decades) it will all end horribly.


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