Don’t look to China to lead the world out of it’s economic woes

Posted on October 14, 2011

For many years and through many recessions, the United States’ economy was the steam engine for the world. It was joked that when the US caught a cold, the rest of the world got the flu. But what happens when the US economy gets the flu?  With economic globalization, the symptoms for regional recessions and financial uncertainty have spread quickly and with far reaching effects.

The US recession induced by the collapse of the housing industry, the enduring high unemployment, the deficiency of corporate investment, and low consumer confidence has now extended to economic provinces throughout the world.  The 17 countries that comprise the European Union have a combined economy larger than the US.  Nevertheless, faced with a developing sovereign debt crisis and enormous banking instability, Europe is  facing an economic meltdown – so there is little chance of Europe assuming the position of the worlds’ economic steam engine.

Over the recent years, China has been steadily and relentlessly developing into a major trade, industrial, and financial superpower. Last year it surpassed Japan as the second largest economy in the world behind the US. China has amassed 3.2 trillion dollars worth of foreign exchange reserves and is holding 1.2 trillion dollars of US treasuries. It is no wonder that the world was looking towards China to be the next steam engine to lead the needed economic recovery.

However, there are major concerns regarding China’s own economic stability. Banks, insurers, and developers have tumbled in value 43% in 2011 Shares of Chinese banks have been seriously deteriorating in spite of recent government purchases in trying to shore them up. These efforts have not changed the bearish outlook. A Chinese report released today has indicated a slowdown in their primary monetary earning  locomotive: EXPORTS.

The government controlled low value of the Chinese Yuan, has long been a key dynamic in maintaining the significant edge China has enjoyed with their exports. In an attempt to put China on a level playing field with their trading partners and effect a reduction of China’s huge trade surplus, the US Senate recently passed a currency measure.  It would pressure China and other countries to allow their currencies to appreciate.  This measure remains to be voted on by the House of Representatives. Nevertheless, China will continue to set its own policy, but, it will take some of the steam from their engine.

For questions /information, contact Joel Borshof: 

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