Tuesday, February 9, 2016

Drag of the Dragon

Do you know why iPhone sales did top out last quarter? Apple said look at China. Do you know why Jaguar and Land Rower sales have dropped affecting our Tata Motors, the owners of the brand? Look at China. Why copper and iron ore prices are low and who has stopped buying? China. Who would be responsible for steel dumping in India? Why global trade is shrinking? Where are the big bad loans in the world? This can go on.

China was a driver of global economic growth and now has become a drag. Its currency is off the hook. Capital flows are reversing. Their forex reserve has come down by almost a trillion USD. Growth is steadily dropping. Dragon is wounded and bleeding. Probably this should have happened a couple of years ago. But China’s central bank and the Govt. decided against it. They tweaked many policies for a soft landing. But it appears like they were not entirely successful as their economy seems to be touching the ground hard and crushing many before they can steer it from export driven economy into a consumption based economy.

If other regions of the globe were doing well, China would have turned this around smoothly. But US Fed wants to restore normalcy after providing easy money for years that has triggered the reversal of capital flow from emerging countries. Thanks to China’s huge forex reserves. It sold off around a quarter of it to pay for these reverse flows. But the investment void cannot be filled easily. China’s debt is already high. To keep its economic growth, it built roads to ghost towns. And money is not returning from those projects. They have potential to end up as bad loans which will make the economy suffer for long times to come.

In a highly connected world, China can impact the global trade hugely. It can hurt the sales of US phone maker which in turn can take the chip makers in Taiwan and South Korea down who will further impact the entire supply chain under them. When China was booming, it created mining barons all over the world. Bellary, a town in Karnataka came to prominence with the price it received for its iron ore from China and became home to many political king makers but soon lost its shine when the iron ore prices dropped with reducing demand in China. Be it technology or metal commodities, China was an important end market. As its appetite is lost, it is hurting global trade. India’s growth or US becoming a steady economy is not helping to offset the lost sales in China. So along with China, everyone else is revising down their growth numbers.

In 2015, oil producing countries were biggest losers with a sharp drop in crude oil price. But it benefited other economies by bringing the inflation down. When China loses, no one gains significantly. Probably some jobs will move back to US and China’s neighbors would tear away some of the growth towards them. But that does not take global GDP up. Global markets had a bad start in 2016 and the trend is likely to continue for some more time in this year.

If you think otherwise that there is no problem with the world economy, which country do you think will drive growth and why?

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