Can China Save the World Economy?

By: Graham_Summers

Nope. No chance.

For starters, let’s look at the basic numbers. China’s GDP is now $4.3 trillion, making it the fourth largest economy in the world. However, there’s a HUGE drop off from the first two economies (Europe $16.4 trillion and the US $14.2 trillion) to the third and fourth (Japan $5.0 trillion and China $4.3 trillion). 

As an aside, YES I know that Europe’s economy, and the US’s for that matter, is a disaster. But for now, let’s just focus on China’s role in the world.

Based strictly on plain GDP numbers, the idea that China could somehow pull the Europe and the US’s economies (let alone the rest of the world) into growth is ridiculous. China’s GDP is less than one sixth of the two largest economies’ combined GDPs.  The idea that this country could somehow grow so rapidly as to move the other two economies is like saying that one leg from the knee down could take your entire body for a walk.

It just ain’t gonna happen.

But let’s ignore this for now and take a look at China’s “incredible” GDP growth in 2009: the year the whole world proclaimed that China would lead us out of recession.

China’s stimulus program for that year was $586 billion. That’s the equivalent of 13% of China’s GDP. In plain terms, that’s HECK of a lot of money thrown at the economy. It’d be like the US throwing $1.86 trillion at its economy (more than twice what we did).

Remember, China measures GDP in terms of production, not sales or revenue generated. So if they build a $1 billion skyscraper that no one rents, it counts as $1 billion in GDP growth. With this in mind, is it any wonder that China’s 2009 GDP numbers were incredible? Think about the impact that $586 billion stimulus package had on China’s economy. Just the stimulus alone could account for 10% GDP growth (again, $586 billion out of $4.3 trillion is 13%).

But let’s assume not all of China’s stimulus went straight to GDP. So where did the GDP growth come from? Well, 36% of China’s economy is based on exports. But with  its largest trading partner (the US accounts for 17% of Chinese export trade) NOT in economic recovery (unless you count imaginary jobs and accounting BS as economic growth), it’s tough to stomach China’s “miracle” growth coming from that.

What about domestic demand? Isn’t China shifting its economy away from exports and into domestic consumption? Yes it is. However, the average Chinese worker makes $5-6K per YEAR. The idea that these folks will start loading up on Big Macs and Starbucks’ lattes is ridiculous. Yes, I realize that Big Macs cost $2 in China vs. $4 in the US. But that’s only a 50% price difference for an economy in which the average person earns 1/10th as much as the average US worker. And don’t Chinese workers save 20% of their incomes? That means only $4-4.8K in disposable income, much of which goes to rent and food.

Again, how are you going to get miracle GDP growth out of that?

Finally, and this is a bit of an umbrella argument (one that encompasses everything), China is a centrally controlled, state-run economy. I know, that many commentators like to proclaim China as the ultimate Mecca of capitalism, but the facts are that state-owned enterprises (SOEs) control over 50% of ALL industrial assets in China and account for 30% of Chinese GDP. Again, China remains a state-run economy.

In a state-run economy, when the government says to do something, you do it. Case in point, when the Chinese government told state-owned banks to start lending, they did in a BIG WAY (unlike in the US where we funnel $ trillions into banks, ask them to lend, and then sit and watch them pass out this money to their employees in record bonuses).

 Given that China is posting incredible GDP growth despite all rational explanations indicating it should be showing an economy slowdown, what are the odds that China’s economic numbers are a little “massaged”?

I’d say pretty high.

Good Investing!

Graham Summers

http://gainspainscapital.com

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Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

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