Why Worry about China?

The USA and EU are by far the largest economies in the world. So, why should investors and Forex traders worry about China and its slowing economy? Bloomberg Business puts China’s slowdown in context.

While plenty of ink has been devoted to China’s slowdown this year, the world’s second-largest economy is still on track to grow somewhere close to 7 percent.

That’s almost triple the forecast U.S. rate, nearly five times the Eurozone, and more than 10 times Japan’s expected clip, according to economists surveyed by Bloomberg News.

The point is that China had been growing reliably at 10% or more a year so the fall to 7% and lower is dramatic and comparable to the drop in the US economy in 2008 and the Japanese economy in 1992.

The other issue is that China does not have a truly transparent economic system so often times the figures lie as noted in an article one our Profitable Investing Tips site, Investing when Chinese Economic Data Is Faked.

If investing when Chinese economic data is faked were not a serious issue for investors this would be funny! Regional officials were rewarded for falsifying information that made the Chinese economic miracle seem even more miraculous. Now, when the Chinese economy is going to Hades in a hand basket, officials “admit” that the “real” numbers were substantially lower. Thus, the argument goes, things are not really all that bad because the economy was already slow and this year it has not fallen all that much farther. Where does an investor look for accurate information? Is it wise to simply avoid Chinese stocks? How about the effect that China has on developing economies and the global economy in general?

This later part is why we worry about China.

Chinese Appetite for Raw Materials

An article from the Washington Post published before the deceleration of the Chinese economy and fall in oil prices said that China’s appetite for raw materials was transforming the world.

The rise of China was arguably the biggest economic story of the 2000s. And a huge part of that tale was China’s seemingly insatiable appetite for natural resources around the world.

As China industrialized at a breakneck pace, it bought up staggering quantities of everything from oil to copper to iron ore to wheat. Global commodity prices skyrocketed – with oil famously rising to a record $140 per barrel in 2008. Meanwhile, China’s state-owned companies went on an investment spree in Latin America and Africa, in an attempt to secure mines, cropland, and raw materials.

China roamed the globe buying commodity rights, often with political favors and investment. The loan and growth driven appetite for raw materials drove growth in countries like Brazil. The dramatic slowing of growth in China has driven Brazil into a recession as bad as the Great Depression.

The Effect on the USA

The US State exports to China totaled $124 billion in 2014 according to USChina.org.

China continues to be an important contributor to US economic growth. In 2014, US exports to China totaled $120 billion, making it the third-largest export market for US goods behind Canada and Mexico, our neighbors and NAFTA partners.

This is from the US – China Business Council.

As a matter of perspective Americans buy a fifth of Chinese exports to the USA according to Bloomberg Business.

Americans bought almost $1 out of every $5 worth of goods that China exported in May, the highest share since August 2010.

While Chinese shipments to trading partners including Japan, Europe and South Korea tumbled last month from a year ago, those to the U.S. climbed 7.8 percent. That helped make America the destination for 18.8 percent of China’s exports, outstripping all others. The European Union took 15.1 percent, with 11.9 percent for the Southeast Asian grouping of Asean.

In 2014 the USA imported $467 billion worth of goods from China for a trade deficit of $343 billion according to the United States Census Bureau page on U.S. Trade with China.

The larger issue is that when countries like Brazil fall into recession they reduce purchases of US products and US industry suffers across the board. Why worry about China? When a major economy starts to falter the effects are felt across the globe.