How China's tremors could weaken the world's major economies

[webfact]

How China's tremors could weaken the world's major economies
PAUL WISEMAN, AP Business Writers
DAVID McHUGH, AP Business Writers

WASHINGTON (AP) — China is exporting something new to the world economy: Fear.

Global investors are quaking over the prospect of a devastating slump in the world's second-biggest economy. And they're fast losing confidence that China's policymakers, seemingly so sure-footed in the past, know how to solve the problem.

The worst-case scenario is that a collapsing Chinese economy would derail others around the world — from emerging markets in Chile and Indonesia to industrial powers such the United States, the European Union and Japan.

The free-fall in the stock markets, in the words of David Kelly, chief global strategist at JP Morgan Funds, is "Made in China."

This year, the International Monetary Fund expects China's economy to grow 6.8 percent, which would be its weakest peace since 1990.

China, which was posting double-digit growth in the mid-2000s, is trying to engineer a daunting transition — from overheated growth fueled by exports and often-wasteful investment to slower growth built on consumer spending.

Official numbers show the Chinese economy grew 7 percent from January through March from a year earlier. Yet there's growing suspicion that Beijing's statistics are failing to capture the extent of the slowdown: Auto sales, electricity consumption and construction activity are "all looking very weak," Kelly notes.

"Everybody felt they could slow down to about 7 percent (annual growth) and that wouldn't be the end of the world," says Sung Won Sohn, economist at California State University Channel Islands. "It looks like it's slowing down even beyond that."

Big American companies such as Caterpillar and Chevron have acknowledged the damage that China's troubles are causing them. China's troubles have also depressed several technology stocks. Shares in Apple, which has enjoyed strong sales of iPhones and other products in China, are down nearly 20 percent the past five weeks.

On the surface, at least, the panic on Wall Street might seem overdone. After all, a 1 percent annual drop in China's economy translates into just a 0.2 percent pinch to America's economy, according to Mark Zandi, chief economist at Moody's Analytics. Likewise, a China pullback of that size would slow annual growth in the 19-country eurozone by only 0.10 percent to 0.15 percent, according to UniCredit Research.

That sort of slowdown is hardly catastrophic.

So why the hysteria?

For one thing, China's troubles raise doubts about whether its policymakers have the tools to keep their economy growing at a healthy pace — something that's been a reassuring constant for more than two decades.

Recently, Sohn says, "The Chinese government has not been able to control its economy and the financial market."

Beijing had cushioned its economy during the 2008-2009 financial crisis by ordering state-owned banks to ply companies with loans to build roads, houses and factories. The result: an escalation of corporate debt that's now feeding the problems.

The Chinese authorities also made the misguided decision to talk up stock prices, encouraging inexperienced investors to buy shares. The idea was that companies could issue stock into a rising market and use the proceeds to reduce their debts.

But stocks rose to unsustainable levels and crashed. The government has since been trying in vain to clean up the mess.

The latest trouble started Aug. 11, when Beijing unexpectedly devalued China's currency, the yuan. Authorities explained that they wanted to catch up with investor sentiment, which suggested that the yuan was overvalued from having been linked to a rising U.S. dollar.

Skeptics worried that the devaluation was instead a desperate move to bail out China's struggling exporters: A weaker yuan gives Chinese goods a price edge in foreign markets.

In the aftermath, pain from slower Chinese growth and a weaker yuan could spread. Oxford Economics calculates that a 10 percent drop in the yuan this year would reduce South Korea's growth in 2016 by 1.16 percent and Indonesia's 0.32 percent.

Slowing industrial output and construction in China means less demand for Chilean copper, Australian coal and Brazilian iron ore. It also squeezes Taiwan and South Korea, which make components Chinese factories use to assemble electronics, cars and other products. Also suffering is Japan, which sends about a fifth of its exports to China.

The possibility of a worse-than-expected Chinese downturn has also raised worries in Europe, now in a fragile recovery. The impact will depend on just how bad the slowdown turns out to be. A severe downturn — to, say, 3 percent annual growth — could cost Europe 1 to 2 percentage points in lost economic output cumulatively over five years.

Germany would likely absorb the most pain. In the past decade, German makers of industrial machinery and autos have boosted profits thanks to China's strong growth. In 2013, China overtook the United States as the largest market for luxury carmaker BMW AG. BMW has been cautioning that China's market is enduring a "normalization" and that lower growth is expected.

Andreas Rees, chief German economist at UniCredit Research, notes that China accounts for just 6.5 percent of Germany's exports. "Overall, I think all the frenzy about China is exaggerated," he says.

Yet some analysts say economic calculations might not be enough to measure the risks from a downturn in China's economy. The political and social fallout could exert their own damage.

What if China's slowdown further reduces oil prices, igniting an economic crisis in energy exporter Russia? Would President Vladimir Putin be tempted to distract his people by stirring up more trouble in Ukraine?

Greece accounts for just 2 percent of the eurozone's economy. Yet a Greek budget crisis has raised fears that the country would have to abandon the euro, possibly leading to a breakup of the eurozone.

"Here's this utterly unimportant economy, which is managing to paralyze European policymaking," says Harvard University economist Kenneth Rogoff.

If Greece can threaten European unity, imagine the fallout from a crisis in the world's No. 2 economy. No wonder investors are freaking out.
___

McHugh reported from Frankfurt, Germany. Elaine Kurtenbach in Tokyo, Michael Liedtke in San Francisco and Alex Veiga in Los Angeles contributed to this report.

-- (c) Associated Press 2015-08-25

[arfurcrown]

Bubbles were never long lived and the Chinese economy like a good many other so called ''advanced countries economies'' are no more than bubbles of illusion created to enrich a few people.

Or of course there could be a reason behind the current situation.

Financial warfare is indeed a very effective way to advance a country's or private business conglomerates territorial financial stakes.

The world can, and likely will be conquered without warfare as we accept it using old fashioned ordinance which creates enormous collateral damage and costs a fortune to rebuild.

Edited August 25, 2015 by arfurcrown

[zaphod reborn]

China's economy is maturing. 7% annual growth is not sustainable. The prior growth numbers represented a bubble, fueled by wild speculation and over-consumption of natural resources. The world needs to get used to it. It's nothing to fear.

[Publicus]

Nobody is better at financial warfare than the Treasury department which of course does not have an office named "Financial Warfare Bureau" or any such. US financial warfare is however focused on Russia, not China. The CCP Chinese are doing all of this to themselves and all by themselves, as expected, anticipated, projected. As of 2012-13 many experts had forecast the present financial chaos to occur during next year, 2016, so the CCP Boyz in Beijing are outdoing themselves as we move in to Q4 of this year.

We can be confident the major economies of the world have been anticipating the inevitable financial collapse of the CCP China. All the same, the collapsing of a big (not major) economy such as China, Russia, Brazil and the like is never a smooth or carefree ride for anyone. The US, EU, Japan are not caught unaware or unprepared for this however.

US shortseller Jim Chanos who'd done years of hollering about the US subprime disaster in the making, has been saying since 2000 the CCP financial system is "built on quicksand." The CCP reformer PM Wen Jiabao said in 2007 while he had still been in office (until 2010), "A country that appears peaceful and stable may encounter unexpected crises. There are structural problems in China's economy which cause unsteady, unbalanced, uncoordinated, unstable, unsustainable development."

Lesser regional economic groupings such as Asean in particular are always vulnerable in the extreme. In 1997 it was the baht currency which made Thailand the epicenter of a crisis and collapse that unexpectedly reverberated globally. While this time it's the Chinese yuan currency, and the Malaysian currency is getting hammered, the present CCP China crash is just not unexpected nor is it a surprise. It is the old problem of capital fleeing the CCP China leaving the economy and financial systems short, very short. Which in turn shreds the currency.

This is a CCP China problem that the major economies of the world can and will handle. The CCP China is no longer the world's factory floor and exports have been stagnant since 2012. So this is not a surprise to Western economies.

Edited August 25, 2015 by Publicus

[weegee]

Is it just hearsay?...US is worried China will sell of it's US debt, to anyone with enough cash to buy it.....? (Arab States)

Heard this comment yesterday....anyone know?

[Publicus]

 

Is it just hearsay?...US is worried China will sell of it's US debt, to anyone with enough cash to buy it.....? (Arab States)

Heard this comment yesterday....anyone know?

 

Nothing new in that and as always nothing to see in it. The CCP Boyz aren't ever going to try any such thing, primarily because it would be financial and economic suicide. I haven't asked them myself about this, but if I did they'd instantly confirm the fact.

The CCP Boyz need the USD reserves they have and they need the gold they've been buying below the public radar the past six years. Without their USD holdings the CCP China would collapse in an instant. Their forex and gold holding are the only thing presently standing between the CCP Boyz and a spontaneous combustion. Global markets have no confidence in the Boyz now; without their USD, forex, gold, China would disappear overnight.

The Boyz know that if they try to sell their USD holdings, which are about $1.3 Trillion of their $4.3 Trillion as of three months ago, the yuan explodes. The Boyz as things are have reduced their forex holdings to $3.6 Trillion after selling $400 billion of US Treasuries at the paltry 3% to raise cash to throw into their collapsing financial system, and another $340 billion in stock market intervention due to the latest crashes.

It is forecast the Boyz will convert to liquidity an average of $40 billion a month of US Treasuries at firesale rates going in to next year with no end in sight. In Russia they move usd forex reserves in the tens of billions of dollars, in China they move the US bucks several hundred billion each time. US bucks disappear at the same inexorable rate however in either place.

Besides, the one thing the rumormongers overlook completely in their incessant yapping about the Boyz calling in US Treasuries is that the US possesses all of 'em. China possesses none, Russia possesses none etc. Treasury issues notes indicating purchases and the notes (or Treasuries themselves) can be frozen at any time by executive order of POTUS.

Any foreign government or entity that might want to get their hands on their purchased Treasuries is going to have to go to the Treasury Department next to the White House to try to get 'em if they want to try to sell to somebody else. Then they'd also have to take physical control of the Fed building in Washington and the Fed regional bank building in Manhattan with its deep subterranian vaults in bedrock. None of which would go well for 'em.

The United States is not about to allow itself to be financially blackmailed by any foreign power, especially the gangs of thug dictators and tyrants in Beijing or Moscow.

Edited August 25, 2015 by Publicus

[Srikcir]

I expect a continued drop in the value of the yuan by about 10% through the end of 2015.

The Chinese authorities will prefer to quickly over-correct the currency to cut off investor concerns over the long-term.

[Usernames]

Is it just hearsay?...US is worried China will sell of it's US debt, to anyone with enough cash to buy it.....? (Arab States)

Heard this comment yesterday....anyone know?

I like this idea! The Chinese sell their US debt to the Iranians for ten cents on the dollar, the Iranians demand payment, and then President Trump refreezes all their assets, including the debt. The US wins again.

[Publicus]

I expect a continued drop in the value of the yuan by about 10% through the end of 2015.

The Chinese authorities will prefer to quickly over-correct the currency to cut off investor concerns over the long-term.

By 10% was their original notion, yes. The hugely adverse global reaction to the Boyz' sudden move has frozen the Boyz in this and in just about anything else they need to deal with.

It's the old adage about the alligators and the swamp.....