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Posted: July 03, 2012

Forget Greece - what about China?

If they catch a cold, we're getting the flu

Fred Taylor

Despite the European sovereign debt crisis, what really has me worried is what is happening in the most populous country on earth -China. If we go back to late 2008 when U.S. banks were hanging by a thread, China saved the day with its $ 590 billion stimulus package. The Chinese kept the commodity markets afloat and provided some much needed global confidence that their economy wasn't about to collapse.

Fast-forward to today and growth in China has slowed dramatically. The country's Gross Domestic Product was 8.1 percent in the first quarter of 2012, a steep decline from the 9.7 percent GDP growth China posted for the same quarter in 2011 and its slowest pace in three years.  Industrial production in China is now at 9.6 percent down from 12.4 percent for the first quarter in 2011. China's factory sector is shrinking too, the country just reported the eighth month in a row of slower growth. Export orders sentiment registered the lowest reading since the first quarter of 2009.

Europe's woes might be weighing on China's economy, as 22 percent of China's exports go to Europe, which accounts for 6 percent of the nation's GDP.

China's slowing growth certainly has the potential to impact the global economy. In the old days, markets used the adage that if the U.S. caught a cold, the rest of the world got the flu. These days, China is the country that matters most and whether we like it or not, the Chinese own over a trillion dollars of our debt, which they paid for from earnings on the exports they sold us.

There is a symbiotic relationship between us and our neighbors to the East. The United States exports $100 billion a year to China and as a buyer of U.S. goods, China ranks third behind Canada and Mexico. U.S. companies that sell agricultural products, electronics, chemicals, and transportation equipment would be most adversely impacted by a decline in demand from China.

If China were to grow at only 5 percent a year, that would mean the country wouldn't have enough money to keep funding our massive budget deficits and that could cause our interest rates to rise. Even a small correction in rates on the U.S. 10-year Treasury bond could result in a significant price decline.

Similar to 2008, the Chinese government could really restore confidence in the global economy if it were to continue to lower interest rates when given the opportunity to do so. Providing a massive stimulus package through a national infrastructure spending program, or providing some kind debt guarantee package to the floundering southern European nations could also help. Here's hoping the Chinese act sooner rather than later.

 

Fred Taylor co-founded Northstar Investment Advisors, LLC in 1995. The firm specializes in managing personalized investment portfolios for individuals, families, and retirees with a focus on income generation. He is a member of the Colorado Forum and also served as an economic advisor to Colorado Governor Bill Ritter from 2008 to 2010.

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