China and the world economy

It's been a pretty busy (and lousy) week, economically speaking, hasn't it?  May as well close the working week with something to think about over the weekend.

Last week Marc Faber warned investors about China's economy.

Forget Greece, which is an "insignificant" economy, it is China that poses the biggest risk to the global economy, Marc Faber ... told CNBC on Friday.

. . .

... a slowdown in China, the world's second-largest economy, would have a huge impact on prices of industrial commodities, Faber said.

"In turn, this has a huge impact on the economies of countries like Brazil, the Middle East, Central Asia, Africa, and Australasia, so these countries could slow down meaningfully," he said.

Faber, who correctly predicted the 1987 stock market crash and more recently forecast the stock market correction in August last year, said China's economy depends largely on capital spending, which tends to be volatile and has a strong multiplier effect on the economy.

A slowdown in China could have a painful impact on global gross domestic product growth as the nation is now the single largest contributor to global economic growth, the International Monetary Fund said earlier this year. The nation's contribution to global economic growth over 2010-13 is expected to be 31 percent, up from just 8 percent in the 1980s, the IMF said.

There's more at the link.

Earlier this week I quoted reports indicating that China's economic data were suspect, and speculating that its demand for raw materials had greatly diminished.  As if final confirmation were needed, yesterday the New York Times reported:

A nationwide real estate downturn, stalling exports and declining consumer confidence have produced what a Chinese cabinet adviser, quoted on the official government Web site on Thursday, characterized as a “sharp slowdown in the economy.”

. . .

The most striking feature of the slowdown is that it extends beyond the coastal provinces, which depend on exports and are closely linked to the global economy, to the country’s far more insular interior, including cities like Xi’an here in northwestern China.

China’s unexpected economic difficulties are starting to unnerve investors in world markets, especially commodity markets, as China is the world’s largest consumer of most raw materials and the second-largest consumer of oil.

A deepening slowdown would ripple across the world economy. Until now, China’s economy barreled ahead mostly unhindered as the main engine of global growth, even as Europe struggled with its government debt crisis and the United States limped along with a crippled housing market.

. . .

The economy barely grew in the first quarter compared with the fourth quarter of 2011, and the second quarter of this year is likely to show even less growth from the preceding quarter, said Diana Choyleva, a China economist in the Hong Kong office of Lombard Street Research.

The World Bank also warned on Wednesday of a slowdown.

“Clearly the economy is much, much weaker than most people thought until recently,” Ms. Choyleva said. “They have a real mess on their hands.”

China is the world’s largest importer of a long list of commodities, like iron ore and copper. It has also been a big buyer of European factory equipment and luxury goods. The United States economy is much less exposed to a slowdown in the Chinese economy, with exports of goods to China representing less than 0.7 percent of American economic output last year.

Again, more at the link.

Read that first report again.  China is - I should say was - expected to contribute approximately one-third of worldwide economic growth from 2010-2013.  That's a staggering concentration of economic power in one single economy (out of 196 countries in the world).  If that economy stalls now - correction:  China's economy is stalling now - with more than a third of that four-year period still left to run, you can expect everything it's contributed to worldwide economic growth from 2010 until now to be reversed, and then some.  It's a cause-and-effect relationship all the way.  Consider:

• Every nation exporting significant quantities of raw materials sold a lot of them to China.  (For example, that's one reason why gasoline prices have been so high over the past couple of years - China was competing with the USA and other industrialized economies to buy a finite supply of crude oil.)
• China turned those raw materials into (largely) consumer goods, and sold them to countries with the necessary consumer base to buy them.
• Thanks to the worldwide financial crisis, those consumers - mainly concentrated in Europe and North America - are no longer able to afford those manufactured goods to the same extent;  therefore, China cannot sell as many of them as before.
• That means China must cut back on how much it manufactures, meaning in turn that it will require less - a lot less - raw materials.
• Therefore, countries whose economies are reliant on raw material exports will earn much less from Chinese sources, and thus have much less money available to buy things that they need - including products manufactured in Europe and North America.
• Therefore, manufacturers in Europe and North America - and every company that supports them - will not be able to employ as many workers, or pay them such good salaries.
• Therefore, workers - and former workers - in Europe and North America will be even worse off, unable to buy as many consumer goods as before, thus putting even more pressure on the Chinese economy and its export markets, and further diminishing its appetite for raw materials.

Can you say 'vicious circle'?  Hel-looooo, global economic slowdown.

Peter