China and the Global Economy

From Night Watch we have this note and analysis.  With a nod to "City Life", this is, in some ways, along the lines of thought of producer John McDonough.

China:  The Ministry of Commerce said on 16 November that China's exports are feeling pressure from global economic uncertainties. A spokesman said the ministry cannot be optimistic about the export situation during the coming period, citing a downshift in global economic recovery, a downgrade of the US credit rating and the expansion of the European debt crisis. He said that frequent protectionist measures and trade disputes have had a "relatively large influence" on China's exports and that these issues, along with rising costs at home, have complicated China's foreign trade outlook.

Comment:  The Xinhua report is significant for several reasons. First it disclosed that the Chinese government expects that the credit rating of the United States will be downgraded. Second, the Chinese economists predict a contraction of the global economy. Finally, the Chinese anticipate a contraction of globalization as the result of protectionist policies, in other words, a reassertion of economic nationalism. The Chinese seem to expect that the export markets for cheap Chinese manufactures will shrink and the prices for raw materials will rise.

The apparent Chinese linkage of the US credit rating to the European debt crisis implies that the Chinese know or believe that US banks have much greater exposure to European sovereign debt than they have admitted. The Chinese assessment evidently is that Europe will drag down the US.

One Chinese economist, a professor of finance at the Chinese University of Hong Kong, recently wrote that the Chinese banking system is nearly bankrupt already and China's Gross Domestic Product is declining, but the Chinese are hiding the data. He wrote that "every province in China is Greece."

This note is a warning to hedge bets in China in 2012.

But, it isn't just China.

Here is a report in The Wall Street Journal, which is at a stub link here.

Europe's debt troubles on Tuesday spilled over to top-rated nations that had been largely untouched by the crisis—including Austria, the Netherlands, Finland and France—in an ominous sign for European policy makers.

Bond yields across the Continent jumped as prices dropped, in a sign of investors' faltering confidence in officials' ability to keep the debt crisis contained in the euro zone's troubled peripheral countries.  Tuesday's selloff came amid news that the euro zone's economy scarcely grew in the third quarter.

The economic situation is not getting better and the fact is that the economists don't really have an answer for us.  The number of folks who think that printing money is the answer decreases every day.

One thing to keep in mind is that part of what has fueled China's growth has been their willingness to ignore environmental issue and their low wages.  The low wages issue could well be self correcting as workers in China realize that not everyone works for such low wages.  Of course, that probably doesn't impact the prison labor that China has been employing.

Regards  —  Cliff