This development does not bode well for world trade. And it shows that commodity prices may be at risk of a renewed slump. Speculation can go only so far!
The Decoupling Myth Revived …
Two short years ago there was much talk about a decoupling of the Asian emerging markets from the U.S. However, since the U.S. was — and still is — the most important client of the Asian, export-oriented growth countries, I didn’t buy that argument. Hence I expected the recession to become a global event … a recession that was loudly heralded by an inverse U.S. yield curve and by the U.S. Index of Leading Economic Indicators.
Sure enough, the U.S. economy took the lead and the rest of the world followed suit. And no decoupling took place.
Two years, a recession, and a severe bear market later, a variation of the same story is back in vogue. But can the Asian emerging markets, especially China, lead the world economy out of the slump. Is this story probable?
Mammoth Government Stimulus …
Like so many other countries, China’s answer to the global recession was massive stimulus. And why not? China never swore off communism, so government interventions are fully conforming to their political credo.
So far, the country’s stimulus program has amounted to $585 billion, and the central bank triggered an explosion in credit by scrapping quotas on lending in November 2008.
As you can see in the chart below, that’s exactly when the Chinese stock market bottomed … Now the index is up 78 percent from its November low. But even so, it’s still down 50 percent from its October 2007 high.
Obviously, the huge stimulus and money printing by the Chinese central bank has already had some impact on their stock market. And the positive chart pattern suggests even more to come — after an overdue correction, that is.
On top of that, the stimulus has invoked the aforementioned wave of commodity speculation.
Put simply, easy money is sloshing around and chasing financial and commodity prices higher. But that is definitely not the government’s desired goal!
So the big question is … How is China’s Real Economy Responding to the Stimulus?
In May, China’s exports fell by a record amount … down 26.4 percent from a year earlier. In June the government said unemployment was worsening, and a quick rebound in trade was becoming less likely. The State Council even said that “the foundations for an economic recovery aren’t solid.” And Vice Commerce Minister Zhong Shan added that trade faces “unprecedented difficulties.”
Moreover, on June 22, Bloomberg reported that China Shipping Container Lines Co., the country’s second-biggest box carrier, plans to almost double rates on Asia-Europe routes next month to help offset possible losses on weakening demand.
None of this sounds bullish to me!
Yes, China’s economy is still growing, but a global growth engine? I still have my doubts. Emerging markets have always been and still are a leveraged play on the U.S., and if the world economy is due for a recovery, it has to come from its major force ― the U.S.
Bottom line: China may be on its way to displace the U.S. as the world’s major economy and growth engine. But it has not yet done so.
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