China seems so far away, practically the other side of the world. As to the impact it has on our economy, it might be as near as Canada.
In fact, according to State Street Global Advisors projections, by 2018, China will overtake Canada as our primary trading partner.
“China is the world’s second-largest economy next to our own,” says Robert Mittelstaedt, dean of Arizona State University’s W.P. Carey School of Business in a bankrate.com article. “They are a huge trading partner, and our two economies are incredibly intertwined.”
China’s wave of prosperity has been touted as a success story. “China has had 20 years of 10% growth uninterrupted, never before seen on this planet,” stated JPMorgan (JPM) CEO Jamie Dimon in a Bloomberg TV interview.
But much of that growth was fueled by speculation and a stunning dependence on debt, often at the behest of the Chinese central government, according to Robert Hockett, Edward Cornell Professor of Law at Cornell University.
Writing in the Huffington Post, Hockett states the Chinese government “first…targeted real estate, directing state-owned banks to extend credit on cheap terms for speculative residential and commercial real estate investments. Then it targeted stocks and other financial instruments, allowing and then encouraging lenders to facilitate purchases of speculative assets on margin.”
As a result, according to a recent McKinsey Global Institute report, China’s debt-to-GDP ratio sits at a shocking 240%.
In the meantime, the government also directed the development of “ghost cities,” constructing housing office towers, administrative centers, government buildings, museums, theaters and sports fields where there was literally no demand. This building boom, together with other industrial expansion, required vast amounts of raw materials and industrial equipment, making China into a major worldwide importer of such goods.
As China’s economy has slowed, three main things have resulted: China’s industries have stopped buying so much. Its middle class citizens have stopped purchasing as many foreign-made goods, and its stock market has faltered.
The net effect on the U.S. economy is considerable.
As Chinese citizens slow purchasing of U.S.-made goods, corporate profits slide; declining corporate profits have a negative effect on the U.S. stock market.
“Even if you just invested in the (Standard & Poor’s 500 index), you’d have a lot of exposure to China because a lot of those companies make more and more of their money in China,” Keith Fitz-Gerald, the chief investment strategist for investment newsletter Money Morning, said to bankrate.com.
According to CNN Money, slowing growth in China “would disproportionately hurt multinational companies.” Firms like United Technologies have already seen a significant drop in [Chinese] orders for new equipment, for example.
“And even those companies that appear relatively immune from the Chinese economy (think Verizon, for instance) may find their stock prices moving in sympathy… as investment managers find themselves selling strong companies to keep their portfolios balanced,” opines Vikram Mansharamani writing for PBS.org.
The drop in China’s demand for energy resulting from the slowdown has even had an impact on oil prices (which in themselves have roiled U.S. markets).
In 2009, according to the US Energy Information Administration, China became the second largest net importer of crude oil and petroleum products in the world. As of 2013, “China surpassed the US to become the world’s largest net importer of petroleum and other liquids in 2013, on the back of its rising oil consumption,” according to Forbes.com.
But any impact felt to date will seem paltry if the crushing debt burden incurred by Chinese companies and localities leads to an economic crash.
“You have a 1-2 punch coming in the next decade [for China]: An aging society and debt,” Derek Scissors, a scholar at the American Enterprise Institute, told CNN Money. “It’s a lethal combination for any country.”
Some financial experts fret that, just as with the U.S. mortgage-debt-fueled debacle of 2008, toxic loans in China could trigger a financial crisis to envelop the globe.
“A financial panic…could potentially plunge the world into recession, particularly if it spread throughout Asia,” George Hoguet, global investment strategist at State Street Global Advisors, told CNN Money.
The hope is that the China’s government vast reserves of cash would stave off such a catastrophe.
The advent of globalism had a lot of people excited. Trade doors were open, economies were stimulated and everybody was singing Kum-ba-ya. The downside of so much economic interrelation becomes more evident by the day. As the old saying goes, ‘May you live in interesting times….’