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Can China save the world from this unprecedented market meltdown?
That is precisely the reason I have travelled especially to China this week - to find the answer. I rarely go away whilst I am in the market but as I am in cash I thought it safe enough to travel.
I recall travelling to the USA three years ago when world equity markets and the USA in particular were roaring ahead. The economic stats for the USA were not good at the time but more particularly the air was eerie. I was there only for a few days but I could tell by the average person’s demeanour, their language, and their expenditure habits this economy was on thin ice. Economic stats are historical but we can glean much by observing about what lies ahead.
As an aside only a few weeks ago in Sydney someone asked if they could borrow my paper. I had the Financial Review and the Telegraph. I asked him did he want history or the future – which amused him. The latter is a better guide to where the minds and wallets of the average consumer are heading.
So too in China. It is tougher to fly into Shanghais and make a similar quick assessment of an economy so foreign but clues you can find.
My goal was to understand whether the demise of the western banking system will effect China and will that impact on our local economy.
Chinas has been branded an export economy but that is not all. Western demand and the USA in particular is important to China but domestic consumer expenditure and business and government investment has been much more important in the 10% year on year GDP growth we have seen since the economy was ‘freed up’ 30 years ago.
Consumer expenditure is still very strong but I was impressed by the awareness of many average citizens I came into contact with, of the global financial melt down. So there is a little caution. House prices are easing but not plummeting as we could see in some western economies.
The Chinese are net savers whereas the average western consumer is a negative saver – borrowing more than they can afford. Therein lies a massive difference and part of the western ailment – not just for consumers but also business, government and Banks!!! It has been do as I say not what I do as far as the banks are concerned.
Investment expenditure is still very strong in China. They have monstrous infrastructure plans which are largely government backed and these should continue barring world catastrophic events.
The Minister of Finance stated this week that China’s financial liquidity is in good health. But we have seen banks worldwide say this only to see a bail out days later sought.
One of the problems is Central Banks world wide are printing money willy nilly and just as we have seen banks go broke we could see this happen to countries other than Iceland – as we saw this week. These are unprecedented times.
China is in good health but cannot stand aside unaffected if we saw a continued rout. Certainly demand for resources from Australia is going to ease as we see China GDP slows from in excess of 10% to maybe as low as 5% (currently about 8%).
But this financial tsunami will exhaust and the ‘phoenix will rise again’ we are getting so close but not quite there yet. Stick around.
Enjoy the ride
Tom Scollon
Chief Analyst
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