The Impact of a European and US Slowdown on China

October 3, 2011

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8.10.2010 From China : The Emperor Wears no Clothes

Prior to the Asian flu in 1997, Russia had been experiencing strong growth by selling raw materials to the Asian Tigers, who had been engineering their own real estate bubble. When the credit dried up, Asian currencies began crashing, and Asia stopped buying raw materials from Russia. This provoked an unexpected Russian default the following year. China’s strength has been exporting to Europe and the US, who are now mired in debt and seemingly destined for slow growth.  Europe remains their largest export market, and the recent depreciation in currency, means a subsequent rise in goods sold.  There seem strong parallels – Asia in 1997 compares with Europe in 2010, as Russia in 1997, compares with China in 2010.

Jim Chanos has since shown that exports make up an infinitesimal amount of China’s GDP. Most of the growth has been building their house of cards. Fixed asset investment is estimated to be somewhere around 70%.

Still, a slowdown in Europe and the US would only compound China’s problems, according to an IMF study.

“A recent IMF study examined the effect of a potential global recession on the Asian economies, assuming -1% growth in the US and -3.5% in the Eurozone. Its analysis suggested that growth in China would be lowered by 4%. Applying these estimates, which we think are reasonable, Chinese growth could slow to 4.5% in 2012.

China has been actively trying to slow their economy, yet the consensus is still calling for 8% growth until infinity. Speculation is that social stability would become more volatile below growth of 7%. The other problem is the room for more stimulus is much more limited now than 2008, less policy set off hyperinflation.

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