China is among the world’s fastest growing economies. Shanghai and Shenzhen are home to its hottest stock market. Now, many investors regard the evolving Asian behemoth as the antidote to a slowing US economy, picking up the slack in global growth as the American consumer retreats. They probably shouldn’t.
China’s growth has been fuelled by exports and investment, not consumers, whose share of the country’s gross domestic product (GDP) is declining. “The average consumer in China isn’t a credit-card-toting shopper roaming malls in search of fashionable jeans or a large screen television,” says Joseph Quinlan, New York-based chief market strategist at Bank of America Capital Management. Instead, the average household banks a quarter of its after-tax income to compensate for reduced government outlays for health care, unemployment benefits and pensions; costlier housing; loss of guaranteed lifetime employment; and rising school-related expenses in a country obsessed with education.
“While China’s global presence in certain industries has grown in significance over the past decade, Chinese consumers are not ready to drive global demand,” Quinlan says. “The Chinese are in no position to fill a consumption vacuum left by the US.” China is a big part of a growing consensus that emerging market countries can break free of their traditional dependence on the US consumer and their own expanding domestic demand can cushion the global impact of a slowing US economy. Proponents of this thesis include Goldman Sachs Group Inc., Merrill Lynch & Co. and Lehman Brothers Holdings Inc.
The four Brics—Brazil, Russia, India and China—which sport growth rates of 5.4-11.5%, may be the toast of the evolving economic order. But declaring them the new citadels of the world economy is a stretch and premature. Their collective end-2006 GDP was $5.6 trillion (Rs221.2 trillion): that’s 43% of US GDP, 56% of the 13-nation euro area’s and 130% of Japan’s. The gap between their stock markets is even wider. The aggregate free-float value of the Bric stock markets is a mere 4.9% of world market value, according to Morgan Stanley Capital International. The four Brics are 12% of the US market value, 16% of Europe’s and 56% of Japan’s.
“Before we ring in the decoupling era, it is worth recalling that it has not been tested with a US economy in recession,” Gray Newman, New York-based senior Latin America economist at Morgan Stanley says.
Bottom line: “The old saying, ‘If the US sneezes, the rest of the world catches a cold,’ remains relevant,” said the International Monetary Fund in its April 2007 edition of the World Economic Outlook. How much of a cold depends on how big the sneeze.
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