In the words of an adviser to President Clinton back in the race for the 1992 presidential election, a sign was placed in the campaign office which read “It’s The Economy, Stupid”.
With apologies to that now legendary piece of advice, this week quite a few people needed reminding, “Forget the shares, It’s the Chinese Economy, Stupid!”
All those poor puns about “Chinese Flu’ and ‘China Sneezing” and ‘Shanghai Sneeze’ were just alliteration and an eye for the quick line.
And yet there was a kernel of truth in those headlines and in some of the analysis, a truth that we are going to have to get used to.
For whatever illogical reason when a sudden, sharp correction in China happened Tuesday afternoon (and there was a similar correction in January which passed without notice), the rest of the world took notice.
It was as though investors overseas in places linked to but also distant from China and its roaring economy such as Australia and Central Europe, realised something was wrong.
Was it guilt or a hidden lack of confidence in current stockmarket valuations and guilt in the form of ‘we’ve taken it too far;’ lets take profits and quit’?
Who knows but what we do know now is that China can influence the rest of the world in a way we never thought before.
The nascent Chinese share market, which is full of domestic investors (only 47, yes 47 foreign investors are authorised to invest directly in the Chinese market), shook the bigger, deeper and supposedly more sophisticated markets in Europe, Australia, Japan and especially the US.
Now that’s more than a point of idle interest because it is another brick in a supposition that few people have dared to utter: that the US is losing its influence on world economic activity.
That was best summed up from in all places, in the outlook statement from BHP Billiton which accompanied its 2006 interim profit report last month.
“While we expect a constructive environment, the path of the US economy is uncertain.
“Although the US economy will continue to have an important impact on the global economy, it is increasingly clear that improved economic conditions in other OECD countries and the increased relevance of emerging economies is decreasing the global impact of US economic activity.
“As a result the global impact of a slow down in the US is expected to be lower than generally assumed and we do not anticipate a return of prices to longer run averages over the medium term.”
A paragraph earlier the company had this to say
“Market indicators do not point to large scale supply surpluses emerging in 2007, although demand growth can be expected to vary regionally in line with varying economic activity.
“China is set to continue as the main driver of demand, but more mature markets may also lend support, especially Europe and Japan.
“Despite the expansion of China’s domestic production base, imports of commodities will continue to play a crucial role in supporting the country’s industrialisation.”
No suggestion that China will step in to replace the US but there’s a void emerging. Europe can’t or won’t even though its economy is recovering strongly. It doesn’t have the will or the single mindedness of the US orChina. Japan did but it is still weak from 15 years of under performance and deflation.
BHP Biliton also said:
“Asian economies continue to expand at a solid pace.
“China’s GDP growth was 10.7 per cent in 2006. This is the fourth consecutive year that China’s real GDP growth has exceeded 10 per cent.
“We have seen evidence that recent government tightening of liquidity and investment controls are moderating growth but expansion will continue. India is maintaining robust growth momentum, even as it continues to wrestle with economic reforms.
“Although Japan has recently experienced slower economic growth, business investment and external demand remains robust. Growth in the US has moderated from exceptionally strong levels a year ago. This is reflected in the progressive slowdown in its domestic housing and construction sectors.
“While global industrial activity has been slowing, it is being cushioned by strength in final demand growth in Western Europe and developing economies.
“In the short-term, we expect global growth to moderate, but the economic outlook remains healthy.
“Growth in Asia is likely to persist although we expect further dampening in China’s economic growth due to the momentum of its recent cooling. While we expect growth for the US economy to be below the rate in 2006, a soft landing in the housing sector, strong capital investment and an easing of energy prices should result in a growth rate consistent with long term trends.
“Strong economic activity in Western Europe and an improvement in Japan’s economic outlook should lessen the impact of any slowdown in the US.”
And that’s the story: China has been responsible for up to a third of world economic growth in 2005 and for most of 2006. It will be lower this year because Europe is doing well but for all the talk about the world being more ‘global’ it is now dominated by two economies: China and the US.
China will grow around 10 per cent in real terms this year, the US by 2.5 per cent, Europe by a similar amount, perhaps as high as three per cent.
Given all that it is a long time since share market movements in Britain, Europe, Japan, Asia or Australia drove market sentiment in Australia.
This week’s plunge in the US markets was the biggest there since September 11 when the market re-opened after being closed.
The change in sentiment in China did that: the worries about Iran, the economy and comments by Al Greenspan merely added to the negativity around Tuesday.
Compounding the problem were trading glitches and computer problems which banked up orders and then produced one explosive fall in
