The China Syndrome – Chimerica?

For anyone who watched the opening and closing Olympic ceremonies this summer – “PM” (pre-meltdown) – it sure looked like China was making a huge statement, both to its own people and the rest of the world: we’re here, we’re ready, and we’re officially an active global power. Before the meltdown, Chinese consumers only accounted for 1/3 of China’s sales; the rest was generated from exports. Funny, I bet they didn’t count on the virtual collapse of the global economy, the disappearance of demand from consumers everywhere, the drain on global employment and a deflationary trend that that threatens to prolong this managed depression into a relatively long-term reality.

China had been one of the major buyers of U.S. national debt as our deficits ballooned. But with their own $586 billion stimulus package, their ability to “buy bonds” seems significantly diminished, placing our borrowing base in serious jeopardy. China is hurting; their accelerating unemployment numbers suggest that riots and social unrest lie just beyond the horizon. Demand for Chinese manufactures has fallen with the global meltdown.

The March 4^th Associated Press reported: “Beijing's stimulus is aimed at reducing reliance on exports, which plunged by 17.5 percent in January, by pumping money into the economy through higher spending on public works to boost domestic consumption. [But t]he government points to rising bank lending and power consumption as signs its slump might already be bottoming out.” While Chinese still have huge foreign currency reserves and her people have significantly better savings rates than we do, it is hardly a foregone conclusion that the PRC will still be able to continue to help underwrite our deficits.

As Secretary of State, Hillary Clinton, met her counterpart from the Peoples Republic of China (Foreign Minister Yang Jiechi) on her recent Asia trip, she was less than subtle in hoping that China continues supporting the U.S. national debt: “She thanked Mr. Yang for China’s ‘continuing confidence’ in the United States, as the largest foreign buyer of Treasury securities. He offered a noncommittal statement that China would decide where to invest its foreign-exchange reserves on the basis of safety, value and liquidity.” Feb 22^nd NY Times.

The February 6^th New York Times: “Beijing authorities disclosed [February 2^nd] that based on an agriculture ministry survey of villages just before the Chinese New Year holiday [at the end of January], about 20 million of the nation’s 130 million migrant workers are unemployed… Electric utility use was down nearly 8 percent in December from a year ago in Guangdong and across China. Electricity is an excellent barometer of the Chinese economy because most usage is industrial, said Jing Ulrich, the chairwoman of China equities at JPMorgan Chase.” The February 23^rd NY Times noted that the area in the southern and coastal regions of China are particularly hard hit – the heart of the export market.

But don’t count the Chinese down and out. With a centralized government, China can change directions faster than most. China can address problems with amazing focus, eventually transitioning their “we make things that others design” economy into one that originates and elevates in quality. For some of us, the mantra of our youth was a notion that if the tag said “made in Japan,” it merchandise was probably cheap and shoddy. How times change. China seems irretrievably on that path. Their annual production of patents is clearly out-accelerating our own.

The signs of China’s coming of age, notwithstanding the economy, are everywhere. China is still living up to its de facto announcement; they are an active global citizen. They provide back-channel diplomacy to douse fires – much like the détente the effected in North Korea. They even set their warships off Somalia to participate in a multinational force aimed at stabilizing the shipping lanes from the massive piracy that has plagued the area. Small signs of profound import.

But in the long term, China’s consumption patterns, her environmental pollution as she struggles to regain its former glory, perhaps usurping the United States as the world’s largest economy sooner rather than later, her competition for global resources – minerals, timber, oil and food – eventually bidding up prices for these commodities, and her astronomical increase in automobiles (perhaps temporarily put on hold pending a better economy) and other energy-sucking consumer goods, may threaten us in a different way… but there may well be a huge silver lining in this effort, notwithstanding some harsh side-effects.

Every major financial catastrophe has been able to point to a massive and clear force for economic recovery. The Great Depression ended with the spending associated with World War II. The .com explosion reignited us after the real estate collapse of the early 1990s, and a false real estate economy pulled us out of the .com collapse. Unfortunately, Obama’s alternative energy research stimulus to the contrary, there does not seem to be a harbinger of what massive force is going to be our savior this time.

Unless, of course, you believe Jim Cramer, a well-known market analyst (CNBC) who blogged on the February 4^th theStreet.com, that maybe it will be China’s growth itself that is the force that will lead the world back to economic stability: “China doesn't do anything small. It will build big, it will feed big, it will use energy big, it will buy big, and we should do everything we can not to stand in the way of China even though it is clear that a Democratic U.S. president and his Treasury secretary aren't going to be out there being all warm and fuzzy with the Chinese. . . Do not scorn this move. In a universe where every day I see companies' prospects get worse, not better, China is the only good game in town, and on Earth, for that matter.”

As Douglas McIntyre points out in his March 3^rd blog, China’s economy is even a measure of our own recovery: “China’s GDP has to stop falling and hold at a level of 6% growth. If it drops well below that, it means that demand for inexpensive manufactured goods in the US, UK, and EU has dried up completely. If China economic expansion holds, even at levels that are low compared to the last decade, there is a sign that economic activity in the West still has a pulse.” 2008 showed a 6.8% growth, and while the Chinese government believes that it can push growth to 8%, most analysts suggest that even 6% is optimistic, but it is still growth! We’re contracting!

So Chinese-American interdependence may be the force that saves the economic world – if that relationship remains intact. “Chimerica” is a word coined by Harvard Professor, Niall Ferguson, who made this recent comment (the February 23^rd www.theglobeandmail.com) about whether or not China will truly cooperate with the United States in dealing with this economic maelstrom: “They have nowhere else to go. They have no other strategy that they can adopt in time to cushion the blow. Their exports are contracting at a terrifying speed. They want at all costs to avoid any kind of big shift in policy. They want to keep, as far as possible, the U.S. importing Chinese goods. They want to keep currencies stable. They are still buying dollars … At least officially, Chimerica is intact. But I stress ‘officially' because there's considerable public disquiet.” If Chimera stops functioning, all bets are off.

Hillary Clinton, touring an energy-efficient power plant in Beijing on her Asia trip, stressed the need for a joint U.S./PRC effort in discovering and building technologies to reduce greenhouse emissions. This may be a part of the solution, if the Chinese buy in, but most of that new growth will come from within China herself – if her leaders so decide. In a world where hope is in short supply and the answers defy the most educated experts and government leaders, it is well worth noting that solutions may well come from unexpected places.

I’m Peter Dekom, and I approve this message.