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China In 2012: Growth Driver Of The World Economy?

February 3, 2012 by  

China In 2012: Growth Driver Of The World Economy?

On Jan. 23, the Chinese New Year began; it is the year of the Dragon. Every year is symbolized by a new animal, following a 12-year cycle. A symbol for good fortune and change, the dragon also stands for progression and perseverance. Given the fact that China has become such an important driver of global growth, it would certainly be good to get a little help from the dragon this year. Will China be able to hold up and help to stabilize the struggling economy in the Western world?

The economic challenges in the Western world remain unsolved; therefore, economic growth will be moderate at best. For the United States, this might mean that gross domestic product growth will remain weak; countries in Europe might even see negative growth in coming quarters. In China, the situation is different. So far, economic growth has been able to keep up surprisingly well and is currently standing around 8 percent. This represents a slowdown from the previous years when growth was in the area of 9 percent to 10 percent. The slower growth rate was primarily caused by two factors. First, the general slowdown and economic crisis in the West, since almost 40 percent of China’s exports go to Europe and the United States. Secondly, the Chinese government has been trying to slow down economic growth in order to control inflation, which is one of the biggest problems.

In recent months, there has been growing optimism that China has successfully managed to control inflation; consumer price inflation fell from 6.5 percent around mid-2011 to 4.2 percent in November, a trend which is clearly encouraging. Chinese policy makers managed to control inflation by taking various measures, which included monetary, fiscal and regulatory adjustments.

Financial markets have been worried about the slowdown in China, realizing how important the country has become for the global economy. In a time when the United States and Europe are struggling like they are today, a hard landing of the Chinese economy would have the potential to turn the crisis in the West into a global recession possibly even a depression so a lot is at stake here. However, there are a number of reasons to be cautiously optimistic that China continues to be a growth driver for the world economy. Especially important is the fact that we are going to see a policy shift in China this year, which should support economic growth.

China has the financial means to give a lot of stimulus to its economy, a much different scenario from the West where deficits and debt burdens are huge and interest rates are at historical lows already. In China, inflation seems to be under control and policy makers will have more room to lower interest rates again, despite the fact that there has been a lot of talk about a real estate bubble in China. While high real estate prices in some of the major cities continue to be a problem, prices have started to come down in a majority of places, a clear indication that the housing market is cooling off a little bit. China is also under pressure to grow the economy and continue to create jobs. Policy makers are very well aware that job growth and improving living standards are the most important factors for social stability in the country.

It seems very likely that we are going to see a policy shift in China this year which should result in accelerating economic growth. This has far-reaching consequences for the Western economies in general and for global financial markets in particular. The psychological impact of this policy change is yet underestimated. China is not the only driver of the global economy, but probably the most important at the moment and much better positioned than some of the other emerging market nations, such as India. India has a lot less room to stimulate its economy, primarily due to fiscal problems and high inflation, despite 13 rate hikes since early 2010.

Market Comparisons
(Chinese Stocks are off to a good start this year)

Fixing the debt problems in Europe and the United States will not only include measures to cut spending. The austerity measures implemented in many Western countries might even make the situation worse, but Western countries also need to restructure their economies and become more competitive; only this will improve the situation long-term. It is clear that this would be easier to achieve if global growth remains robust and does not add further pressure on those countries.

With the policy change in China, there seems to be a good chance that global growth will hold up fairly well and give Western countries a little bit more breathing room. However, Europe and the United States need to make use of this opportunity and bring the house in order. I have my doubts about this, especially in a big election year like we have in 2012, it’s all about making new promises for change and a better tomorrow. Changing things to the better most often includes unpopular adjustments, sometimes even painful adjustments; it’s unlikely that we are going to see too many of these adjustments in a big election year.

With the encouraging progress in Europe (stability fund, fiscal pact, falling risk spreads), the policy change in China and upcoming elections in many major countries, the year 2012 has the potential to surprise to the upside. This is true for economic growth and financial market returns. After a very difficult and volatile 2011, things are starting to improve from rather low levels. Stock markets already anticipate a more positive development going forward. Most major equity markets have started to recover, emerging markets have even seen double digit performance so far this year and it looks as if this could continue in coming months.

In the long run, things can only improve if structural adjustments are being made in the West, and the world will watch this progress very closely. There is hope that the coming years bring positive developments but only if Europe and the United States are able to make convincing steps to address the debt problems and restructure their economies. Emerging markets can have a stabilizing effect on Western economies by providing growth opportunities in many areas. While most emerging markets have been seen as cheap places for production in the past, they are now getting more and more important as new and growing markets where Western companies can sell their goods and services. This growing importance becomes very obvious when one studies the financial reports of major Western corporations, companies that are able to pursue growth opportunities in emerging markets.

It’s good to get a little help from the dragon, but long-term success can be achieved only by structural adjustments in many areas. China continues to be a major driver for the world economy, but the Western world needs to get their act together in order to keep and improve living standards for its people.

Daniel Zurbrügg

is the Managing Partner of Alpine Atlantic Global Asset Management, a Swiss-based independent investment management firm. The firm provides clients with independent investment management, asset protection and family office services and is the issuer of the global investment newsletter Echo From The Alps. With a global network of partners, Alpine Atlantic's aim is to provide clients with true "turnkey" solutions for global investing. Prior to setting up Alpine Atlantic, Daniel held various positions with other banks and financial companies. Daniel is a Chartered Financial Analyst and regular guest speaker at international investment conferences.

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  • s c

    Screw China. Screw Washington. Maybe we should trade ‘leaders’ for a while. Even if our ‘leaders’ had first-rate translators while they screwed-up China’s economy, they’d offend the Chinese people so fast that they’d be run out of China or exterminated.
    China’s leaders, since they don’t have to rely on ‘advisors’ who come complete with hidden agendas, would probably be an instant hit here. Are there any Big Tent utopians who think Chinese leaders would endure open borders or czars who have no real-world experience in ANYTHING?
    Bring it on. Let’s see who gets screwed worse by switching ‘leaders.’

    • http://marcum1@wildblue.net coal miner

      SC

      Amen!Very well said.Thank you.

  • Charlie

    As far as I’m concerned China’s groth can go down the toilet. I as an American am getting tired of supporting their economy. We need to start manufacturing back up inthis country and stop supporting every ecomomy except ours. Wake up America !!!!!!!

    • NC

      Charlie, I thought that george bush had the right idea about how to defeat China when he set out to borrow them broke!

      • http://wolfpack2012.net JThaddeustoad

        Charlie … we do not have to defeat China we need to out produce them with a better product and stop them from stealing our technology get rid of the whores in DC that allow our jobs to go over seas…When that happens the american worker will have to rid itself of unions that pay lardasses abusive pensions and civil service worker who are in unions.. Take care of the poor and throw the lazy out on their asses … generations of irresponsible procreation on behalf of dead wood that contribute nothing ….it is absurd ,,

      • Mary

        For sure they are not going to demand their money back. Who has the money has the power, plus they have slaves and our population many many times more and with discipline which a lot of our people don’t know what that mean here. We’ll pay back one way or the other believe me they getting ready for that. Remember what the US did to UK in the 70′s. We are the UK of the 70′s or worse now. We are messing with the wrong people.

      • http://naver samurai

        Don’t forget how the Clinton-Gore campaign received money from them and I’ll bet that Obama bin Laden has borrowed more from them than Bush did. FOR GOD AND COUNTRY!

      • meteorlady

        Correct me if I’m wrong, but didn’t Clinton give Favored Nation Status to China? To blame GWB is not logical in this case.

        • OB1

          Clinton signed NAFTA, pushed through congress by Newt G. Bsh the 1st really wanted NAFTA. Clinton too. Repub and Dem the same.

        • http://naver samurai

          Well said, Meteorlady. FOR GOD AND COUNTRY!

  • http://wolfpack2012.net JThaddeustoad

    China has the means because there has been a massive transfer of wealth over the past twenty years from the United States… Walmart has decimated main street and unbridled greed on wall street brought us to where we are today …. Goldbugs be advised … Here is some simple logic … China holds alot of paper ( US Treasuries)that is non performing ….just imagine going to sleep on a friday evening with $1600 dollar Gold and waking up monday to $400 dollar gold because China and India cashed out…. cashing out of Gold would breed new life although short lived into Fiat currency… IMHO

    • Sirian

      JT,
      I understand your point and agree yet there are several different scenarios that could be applied to China and it’s present and future economic position. There are an enormous number of side factors that play into this also. Insofar as gold, if you suspect that gold could drop overnight, well, yes, that is possible, always has been. But the same applies to oil, coal, natural gas, copper, steel etc, always has been for those too. It all depends upon the markets and the directions they run. Can the markets be directed? Why of course they can. Even so, why is it that China, India and Russia have been buying up so much gold over the past few months? China just bought over 4500 tons – not pounds – tons of gold. What could be the driving force behind such a purchase? With the idiotic route we’re being shoved down by the all knowing Bernanke, Obama and the rest of the economic wizards in D.C. we haven’t a very lovely economic picture to view. They keep telling us that it is so lovely and shines more and more – as the paint keeps running down the canvas. Do you agree?

      • OB1

        Very wise observation Sirian. The BRIK nations have been discussing getting off the US dollar as the world reserve and forming their own.

  • Sabulaman

    I wonder if a partial gold standard would help? Say 25% backed by gold. It would slow down the printing press, and help to prop up the dollar. ??

    • Sirian

      Sabulaman,
      There is both a Yes & No answer to this question. Yes, we could go to a 25% gold standard and yes, it would bring about somewhat more stability to the U.S. Dollar. But, the level of stability that that course of action would enable, in an overall sense, would be very meager at best. From that, then, the answer is No. Therefore, we would benefit the most – as we should when it is possible, no? – if we were to return to the standard, gold standard that existed prior to 1971. Unfortunately, since that point in time and thanks to good old “Tricky Dick” we have become slaves to the direction the Federal Reserve – private corporation – wishes to push us. Your idea is good since it could possibly slowly begin to maneuver us back to that standard but once more, unfortunately, not as quickly as we have all grown into expecting. Basically, it would not accomplish that much right off. Keep in mind though that an attempt to do something such as this, in the standard manner of legislation, must – MUST – be run through Congress, approved by both houses and the President signing it. Use of executive orders to accomplish it? Well, yes, that is possible too, but who do you know of that would even attempt such an order other than Ron Paul? None, regrettably, none. Am I promoting Ron Paul, no, merely stating facts. He is the only candidate we have running right now that would give us even a glimmer of hope of returning to the gold standard. Romney, Gingrich – no chance. Santorum – possibly yet doubtful. So, again, good idea but it sits amongst so many other good ideas that we have a very, very slim chance of ever seeing come about.

      • meteorlady

        The main reason Nixon took us off the gold standard was because LBJ and his Great Society Programs were such a burden that we could not afford to pay the interest on the borrowed money to run these programs. They put us so far into debt, that keeping the gold standard was would have bankrupted us just paying the interest on that debt with real dollars backed by gold. So the Federal Reserve came up with the grand scheme to devalue our dollar through money printing. This is a hidden form of taxation on every person in this country that owns dollars and has allowed our country to borrow until we have reached critical mass economically. The recent QE1 and 2 have devalued our dollar further and China now has no reason to invest in a falling dollar.

        If we do not get our debt under control this next election cycle, we are doomed to double digit inflation, massive devaluation of our dollar as we loose world reserve currency status, large scale unemployment and a double digit interest rates to get inflation under control. I believe that this will happen in less than 6 years, especially if Obama wins and most of the Democrats are not pushed out of congress.

        It’s time to take this election seriously, and yes, I believe that Ron Paul is the only person that will actually fight to save us. The rest are just robots for their handlers and both parties are corrupt. It’s not even hidden anymore that the politicians obey their masters (campaign contributors) like good little lap dogs in order to get their rewards (insider trading information).

        • CJM

          Have you told this to the RNC/GOP, Meteorlady? I have, several times, and still no response from them. I also asked they why they were letting the dems/libs, leftist media, and george soros select who will be on the November ballot–still not one word from them. Rather scarey wouldn’t you say!!!!!

    • http://naver samurai

      Actually, if we went back onto the gold standard, it would increase the value of our currency and devalue others, like the Euro, Yen, Yuan, and others. FOR GOD AND COUNTRY!

      • meteorlady

        We are so far in DEBT that if we did that we would be bankrupt because we would have to default. I’d love to see us do that. I’d also love to see the “gold” that is supposed to be in Ft. Knox…..

  • Bruce D.

    Japan was undermining our factories in the 80s by subsidizing their own factories until American companies went under. Reagan put a stop to those inequities and Japan went into a 20 year tail spin. I agree with Trump that the U.S. needs to level the playing field with China. We should be raising taxes on companies who outsource jobs or move their companies to China such as GE. We should eliminate the Corporate tax for American companies that keep jobs here.

    • Patriot

      Agree 100%

    • meteorlady

      OK I’m in business. In Washington State where my company used to be located, every time they could not balance their budget they taxed business, it was popular with the liberals. My solution, when the burden became to great was to move to Texas, a much more business friendly state.

      The point is that companies move to protect their income, not to get cheaper labor (I still pay the same wages I did in Washington State). By the time I finished paying city, county, and Washington B&O state taxes, my burden was about 10.7%. Since that is a sales tax state, I was also required to be the tax collector for the state. Add to that 36% federal taxes, employment taxes, workers’ comp, and unemployment, among others, and I am taxed at about 52% or more.

      I cannot reasonably expand with that kind of tax burden and will eventually be force to either move to survive or shut my doors. Right now, if the corruption keeps up in this country and the politicians can’t get more honest and actually do the job they were elected to do, I will probably end up shutting my doors.

  • Quiet Forest

    China is not going to save the world. Their GDP figures are based on the same sort of funny accounting that generates the U.S. government’s ‘official’ figures for inflation and unemployment. Chinese provincial governments have been taking doing things such as building cities in the middle of nowhere that nobody lives in, in order to pad GDP figures. It’s all politics. Their entire economic boom has been based on selling cheap exports to the West. They are still buying our debt even though anyone can see that doing so is financial suicide, because they have to. It’s the only way to keep the West buying. When we stop buying, China implodes. It’s already starting to happen. China is now trying to replace us with the Middle East and India, but that won’t work. Those nations won’t make the same mistakes the U.S. did, in that they will take measures to retain their local industries. In the end, we will be forced to rebuild the industries we should have protected in the first place.

    • Quiet Forest

      Oops. That should read, “Chinese provincial governments have been doing things”.

  • ONTIME

    The PRC is beginning to experience growth problems, economic slow down and agricultural problems, their middle class is growing, prices are increasing and they are becoming a place where production is becoming expensive, they are slowing down and have overspent to build massive projects they should not have engaged in.

    They can increase personal freedoms and risk having the communist party lose it’s grip but then they have this massive military with all these new toys of destruction that they want to incorporate to extend power and gain a influx of needed materials. My bet is they will butt heads militarily with all others to make gain.

    • Ted Crawford

      I believe much the same thing ONTIME, which is why I’m so concerned with a nuclear armed Iran, at least under the current regime. Should Iran posess nuclear capibilities and make, or even threaten, any moves on one of their neighbors, that might be the excuse China needs to unlimber it’s gaint, American financed (our payments to satisfy our debt to them equalls between 50&60% of their military budget), to “stabilize the situation”!
      That would probably cause another allience between us and Russia. The Russians have much more to lose, at least in the short term, than we do!

  • AnneOnymous

    “Given the fact that China has become such an important driver of global growth”..
    Small wonder since most of America’s industrial moguls ratscaped there in order to triple their profits.. Eventually the Chinese will get tired of working for peanuts (like america did) and slap them in the face with organized unions, then what will they do? Try their luck in India? I heard they don’t mind working for peanuts either.

    • CJM

      Anne: China is a communist government and everyone works for the government. A union has NO chance of ever organizing the workers–any attempt to do so will result in either imprisonment for life of death—and the union organizer will have no choice in the matter.

  • Jake Goode

    I think US and China are in bed with each other, and to take an anti-China stance is to hurt the US as well. US manufacturing can only pick up if the US sells to China-because they have the money to buy. God knows Americans and Europeans and Japanese are broke. Already that’s happening – US factories making things for sale in China. And China needs US currency to stay stable, so that it’s US Treasury Bill-backed debts won’t implode. We actually need each other more than we’d like to acknowledge.

    • Ted Crawford

      Any allience between the United States and China would be reminiscent of the one between Hitler and Stalin! We would be playing Russia in this case, and it would certainly turn out the same!

    • CJM

      NO, we don’t Jake. Whatever makes you think that China will honor anything they say? I don’t trust them and I don’t want them having a say in how our country is run—you think they would stand for the US telling them anything???? If you think that political ad where the Chinese laugh at the US as they say: “Now they work for us” is a joke, it isn’t. To hell with them….No Chinese anything, period.

  • CJM

    If Daniel Zerburg thinks its so great in China, then I suggest he move there and become a citizen of that communist cesspool. My answer to you Mr Zerburg is this: The United States and its citizens do NOT need to get anything from China. Now, here’s the corker: Chna owes the USA a great deal of money of past loans; money that China has repeatedly refused to repay (as have several other countries)and has even made public statements referring to that issue. For China to demand a repayment of monies borrowed by the US is a slap in the face in my opinion. The US CAN get hold if its financial mess–by getting of the morrass that is piling up in the swamp of DC. This means, of course, firing the current administration and hold the new administration’s feet to the fire–constantly reminding them who THEY work for. The only down-sizing necessary in the US is the government. As for businesses who are outsourcing our jobs, there is nothing illegal about this; however, they should pay an excise tax on every job they send overseas and the amount ought to be substantial. Furthermore, refusing to provide any sort of aid to foreign countries who are anti-American will certainly save a bundle in the first 6 months of enactment. Of the remaining 4 GOP Presidential contenders, only Ron Paul has that one right! How unfortunate that the RNC/GOP will allow the leftist media and liberal dems/commies, along with georgie boy soros, pick who their nominee will be—-cutsy romney or huffing newt (and more than likely it will be romney, the white obammy).

  • s c

    I find it fascinating that Lenin and Marx ‘blessed’ America with unions, yet China and Russia won’t have anything to do with unions. What the Russians and the Chinese won’t admit is the fact that unions were designed to implode America’s economy.
    When you know that unions are seen as dangerous LIABILITIES in Russia and China, it should make EVERYONE in America wonder why our “leaders” REFUSE to ‘get it.’ As far as I’m concerned, we should outsource unions the same way Uncle Scam has outsourced JOBS for so long. Call it a concerted effort to REDISTRIBUTE THE MISERY. JOBS, yes. Unions, NO!

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