06.30.2010 0

The China Problem

  • On: 07/11/2010 23:38:02
  • In: Economy
  • By Bill Wilson

    One item that stands out in last week’s World Economic Outlook produced by the International Monetary Fund (IMF), besides the U.S. Gross Domestic Product (GDP) likely to grow far slower than projected by the Obama Administration, is the seemingly remarkable pace that emerging and developing economies are growing.

    In India, for example, it is projected the economy there will grow by 9.4 percent this year alone. In Brazil, the IMF foresees 7.1 percent growth this year. Even Indonesia, Malaysia, Philippines, Thailand, and Vietnam will grow by 6.4 percent. Compared with a meager 3.3 growth rate in the U.S. and 1 percent growth in Europe, at first glance it appears that the rest of the world is racing ahead of Western society and the so-called advanced economies.

    This is in part what Barack Obama and Timothy Geithner are looking at when they say that the U.S. can no longer be the world’s engine of economic growth any longer. Geithner, in particular, welcomes the development: “So, for the world to grow together, we have to see more growth in the other major economies. Not just in the emerging markets, which are very strong now, in the United States.”

    In other words, Geithner and Obama want to see the rest of the world, beyond emerging markets, grow faster than the U.S. The policy outlook of the Administration on global economic economics is bad enough. They apparently believe the global redistribution of wealth is at hand, and certainly on the surface, the numbers bear that out.

    Beneath those headlines, however, there could be big trouble for developing economies on the near horizon — and it will hurt everybody in the process. In China, growth will hit 10.5 percent this year, the IMF expects. That may sound robust on the surface, but what’s behind it leaves much to be desired. The global recession is actually hurting the Chinese economy.

    Exports represent about 24.3 percent of China’s ¥33.535 trillion ($4.95 trillion economy). But in 2009, China’s exports dropped to $1.204 trillion from its 2008 level of $1.435 trillion, according to the CIA Factbook, which is a direct result of the financial crisis, the credit contraction, and the recession.

    Couple that with the country’s ¥3.3 trillion ($487 billion) booming construction sector, almost 10 percent of Chinese GDP, along with a real estate sector that has seen prices skyrocket over 160 percent since 2003.

    China is widely considered to be experiencing a real estate bubble, and it sure looks like one. As reported by GlobalPropertyGuide.com, “Outstanding home loan volumes surged 29.5 percent in H1 2009 to CNY3.86 trillion (US$565 billion) after lending rules were relaxed by the People’s Bank of China (PBOC).” That’s over 11.5 percent of Chinese GDP. The report continues, “Banks were very eager to lend, with some offering discounts on mortgage rates for first-time buyers.”

    Unfortunately for the Chinese, this housing boom was not driven by demand for housing per se, but by government edict, easy money, and loose lending. Sound familiar?

    So, there’s a dilemma. When China’s real estate bubble pops, as it did in the U.S. in 2007, what will that look like? According to Andy Xie, “When China’s real estate bubble finally bursts while exports become less competitive, the consequences could be severe.” How severe? As reported by MarketWatch.com, “China’s leading cities could see prices plummet 20 percent to 30 percent by year’s end, while lesser-known cities could see declines of 10 percent to 20 percent, Standard Chartered Bank Ltd. said in a research note Tuesday.” Make no mistake, that would be bad.

    Bear in mind: The IMF report does not anticipate China’s housing bubble popping at all. In the context of its declining exports, a sudden decline property prices would roll up China’s construction sector in short order. Suddenly then, the IMF’s rosy 10.5 percent projected growth for China looks completely unrealistic. Not even China believes it. It’s only projecting 8 percent growth for 2010, according to UPI. They may be anticipating the housing bubble to pop, and when it does, the ripples will be felt worldwide.

    3.3 percent growth for the U.S. doesn’t look so likely then, and the paltry 1 percent growth for Europe looks even less likely. And there’s nothing the American people can even do about it. In fact, a sudden shock to the Chinese economy ala its housing bubble popping — coupled with the ongoing sovereign debt crisis — will likely result in the double-dip recession many economists fear.

    Most importantly for the American people, it will also wreak havoc on the bond market, because suddenly nations like China will have far less money to lend to the world. Presently, the U.S. is dependent on countries like China to finance the national debt — they own about $900.2 billion in outstanding treasuries. Its total dollar-denominated holdings probably amount to about $1.6 trillion.

    For now, China promises that it will not be seeking to convert those assets into gold and other commodities, nor will it be dumping its treasuries holdings, according to a recent report from Reuters. This is a strong message from the Chinese, and it actually constitutes a threat to Barack Obama and the Federal Reserve: “Don’t you dare inflate your debt away, America, and hurt the value of our investments.”

    China should be concerned. Already the Federal Reserve owns about $776.9 billion worth of treasuries, putting it right up there with China and Japan as the top holders of U.S. debt. Basically, since that merely represents printed money to finance government spending, the more that the Fed prints to purchase treasuries, the less they are worth in real value.

    So, a sudden downward adjustment in China’s posture in the bond market — coupled with the economic ripples of their housing bubble popping — would most certainly put considerable strain on U.S. treasury sales.

    Meanwhile, China is very much consolidating its control over the worldwide gold trade. As reported by LearCapital.com, “In April 2009, news finally surfaced that in the period between 2003 to then, China had secretly increased its gold reserves by 76 percent.” As Reuters notes, “China has increased its gold holdings by more than 400 tonnes in the past few years to 1,054 tonnes.” In 2004, China legalized individual ownership of gold and told her citizens to take a portion of their paychecks to buy it.

    Although China may soon be faced with a popped housing bubble, and a smashed construction industry amid sinking exports, they have a fallback position. They have savings. They have stockpiled gold and are busy acquiring tangible assets all over the world. They are even attempting to develop a consumer base and transition away from an export-driven economy, an option under which they can sell goods and services to themselves. As reported by CNNMoney.com, Chinese domestic household consumption is finally increasing after several years of decline.

    So, after years of flooding the U.S. with its products and soaking American capital as the U.S. diminished its manufacturing capacity, and purchasing U.S. debt, China looks like it is about to pivot. However, the American intelligentsia and power elite are so narcissistic and self-involved with more “stimulus” and deficit-spending, they cannot see the forest for the trees.

    China is prepared for any downturn. Are we? No. We’re not. While the threat of a U.S. credit downgrade looms as soon as 2018 and the economy teeters, the White House Office of Management and Budget projects the U.S. will incur $10.6 trillion in new debt (likely) amid robust growth for the next ten years (unlikely).

    The projected growth by economists is merely wishful thinking, a prayer by Washington to make their budget numbers look better. Without that projected growth, the U.S. economy is in peril, and the government will be unable to finance its obligations. All the while, China will be poised to put itself into the global economic driver’s seat, dump its dollar assets, and push for a supranational currency to supplant the dollar, as Americans for Limited Government outlined last year.

    The China problem is not going away — and unless the U.S. policymakers make the conscious decision to lift the burden that excessive government is placing upon the prospects for economic recovery, the 21st Century will not be an American century.

    Bill Wilson is the President of Americans for Limited Government.

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