Much ink has been spilled of late on the question of the Chinese stock market, her economy and the effects these may have upon your portfolios.
Let review the facts and leave the fear to the mongers. Many thanks to this week’s Economist for their lead article, ‘China and the World Economy’.
The US exports less than 1% of GDP to China. Exports are driven by demand. If Chinese demand for US products dries up, the US impact will be nominal.
Chinese GDP grow has slowed from 8% to 4%. If we discount their rather dubious figures by 50%, they have a growth rate of 2% (down from 4%): in line with US growth.
Chinese stock markets are less than 30% of their economy. They are widely known as legalized casinos. Fundamental analysis has no value.
Fewer than 20% of Chinese participate in this ‘punters game’. Those who do borrow heavily to make bets and walk away. This debt is less than 1% of countrywide debt.
Real estate is far more important to the Chinese economy and psyche. While it too is a punters arena, less debt is used or available. Residential remains positive.
Banks have been told to hold lower reserves, at 18%, vs. US banks at 6%.
Massive capital reserves remain on banks and government ledgers. These are available as economic buffers or currency plays (never a wise choice).
The government remains in surplus – unheard of in these United States of Debt…
Government debt remains high at 250% of GDP. Compare this to the US at 90% of GDP. Chinese debt has doubled since ’08. US debt has quadrupled.
Furtive attempts to curtail the stock market have failed. Currency exchange ‘adjustments’ have failed. Speculation remains rife in their stock market.
The Party controls as much as it can – sometimes effectively, oftentimes ad hoc, stumbling from one crisis to the next.
They think they know more than they do. Sound familiar? Pride falls the hero every time.
While the home of capitalism, the Chinese are still ‘remembering’ the rules of the capitalist game. They disagree with much and offer a ‘third way’.
While this way worked well in Singapore, it has yet to be applied effectively in the larger realm of The Middle Kingdom.
Xenophobic or racist, the Chinese have a view towards others that is domineering and demanding. They are not shy of reminding us all that theirs is the oldest civilization.
Private capital flight has increased, moving offshore to the ‘near China sphere’.
Commodity consumption is falling. The economy is transitioning from an export nation to a consumer nation.
Chinese production is shifting, as a result. This will take a decade or more. Her population is both ageing and stabilizing. Demands are shifting to the youth and the aged.
Construction demand has slowed at most levels. ‘Empty cities’ must be filled as older ones are refurbished and renewed.
China consumes 50% of global aluminum, nickel and steel production and 30% of cotton and rice. As it becomes a producer of these materials, it imports less.
Export nations – Germany, Australia, Brazil, Argentina, Mexico – are suffering the consequences. Korea, Singapore and Taiwan suffer less.
The Asian 1997 crisis comes to mind. But today, these nations have no currency flight issues as they are no longer pegged to the USD. They are more elastic.
Global trade has declined as a result of reduced Chinese raw materials demand. This impacts export nations more than import nations (USA).
There is no final answer here. The fear of a domino effect are potentially realistic. If China falls into recession or depression, the global economy may follow suit. As global demand dries up, other nations’ economies shrivel. Europe and the US have no ‘capital elasticity’. Each can raise interest rates as their economies do better; neither can reduce rates lower than 0%. Or can they…
Currencies may collapse as faith disintegrates in the Euro and the USD.
Fascist political choices are cropping up in Spain, Greece, England, Russia, the Middle East and, worst of all, in the US. If these ner-do-wells become leaders, rational behavior is replaced by ideological idiocy. Hatreds easily become war.
Of course, the planet will eventually freeze over in the next Ice Age, too. The seas may rise with temperatures over a thousand years, too. The hidden mufti may appear. The Frog God will swallow the moon (Aboriginal). The great cycle of life and death will consume all.
You have to choose your enemies well. There is a low likelihood of dominos, despots or deluge. While interesting dinner talk, the real world involves more prosaic challenges and opportunities. As I write this, the Dow has dropped by 350+ points. This brings it back to October of 2014. I recall the worry then of slow growth, declining demand and diminishing investment opportunities. I said ‘so what?’ then and repeat it today.
Having been a willing professional participant in the investment world for 30+ years, I can be calloused regarding daily events. We have seen this more than a dozen times in my tenure. As an investor for 20 years prior to 1985, I have even more boring experiences. Yes, wealth can be wiped out. This happens when debt overpowers, not when stock markets gyrate. Want to worry? Worry about excessive governmental debt around the globe. This keeps me up at 4 am…
Events in China indirectly effect our portfolios in the short term. Debt and taxes hurt us all far more deeply. Power plays by Game of Thrones politicians are fearful and can be hurtful. The dynamic of demand and consume will drive economies, despite the sturm und drang of regulations and revisionists.
Over the Labor Day weekend I am reading: Why Information Grows: by Cesar Hidalgo, a Chilean professor at MIT. He offers a refreshing, if complex, answer to the question, ‘Why does the evolution of ideas, life and planets differ from the expected? Physics says that decay is the norm. yet this is clearly false. Why?
I’ll let you know!
Love with abandon!