China I
Since China last week announced that its
new target for growth was 7.5% and not 8%, the financial markets have been busy
discussing with themselves if this was a good or a bad thing. The verdict is
mostly that it is a bad thing.
I do not agree. It is only natural that
after a 10%-a-year growth target 15 years ago, and years of growth in the 8% to
9% range, growth will slow further. China still generates new jobs at a
blistering pace as a growth rate of 7.5% in the world’s 2nd largest
economy generates a lot more $$$ than growing the world’s 20th
largest economy by 10%.
And 7.5% growth is not just 7.5%. In
national accounting, increased imports count as a negative growth element. So
China’s long and slow turn towards a growth driven by domestic demand and
higher imports rather than exports will
necessarily see a negative contribution to growth coming from a steadily
worsening trade balance.
So all in all, the slower growth rate is
nothing to be worried about. Guess we can
sell them some luxury goods...
China II
But there is something else to worried
about. China’s reorientation of the economic growth will inevitably lead to a
worsening of the current account position. Pulled by its incredible export
success over the last decade and a half, China has become one of the largest
creditor nations on earth.
The gigantic trade surpluses paired with a
fixed exchange rate has given China a huge need to purchase US treasury bonds.
If they had not done so, the currency would already have been dramatically
stronger than it is now.
The flip side is that China by this policy
effectively has allowed the US of A to run similar trade deficits without
suffering the traditional consequence of a weaker currency and (much) higher
bond yields.
The stock market manages to spook itself
when China comes out with a monthly current account deficit. In fact, the US
bond market ought to be the most concerned. This
asset class has profited the most from huge Chinese demand. It is in that space the adjustment to a smaller Chinese surplus will happen.
Unless of course the USA suddenly falls in
love with savings and postponed consumption. When pigs fly.
Spain
Spain’s PM Rajoy challenged the new EU
budget orthodoxy by announcing that Spain would end up with a higher budget
deficit than expected in 2012. His statement last week was initially met with a
deafening silence.
But now, some days later, the Euro-zone members are recovering from the surprise,
and predictably, they now demand further cuts. Rajoy pointed out that deep cuts
already had led to slower-than-expected economic growth, and appears unlikely
to cave in, at least not without provoking a debate about the wisdom of
punishing depressed economies with further cutbacks.
The outcome of that debate will be
interesting as a measure of the strength of the backlash against the German
dominance in EU budget matters.
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