Every September, the world's top thinkers get together in
support of President Bill Clinton's "Clinton Global Initiative," an
organization that identifies global problems -- and solutions. At
the many panel discussions held at this past month's conference in
New York City, key concerns were spelled out, and it was an easy to
miss a small comment made by
Dow Chemical (NYSE:
CEO Andrew Liveris.
While the Chinese government -- and many economists -- speak of
aneconomy that is growing 7% this year, Liveris pegs that rate at
just 2% -- at best. He should know: China is now Dow Chemical's
For that matter, a rising number of U.S. companies have been
counting on China and its neighbors for sales growth as Europe --
America's longstanding top trading partner -- has stumbled in
recent years. In 2011, the U.S. exported more than $100 billion in
goods and services to China, and many companies have been laying
the foundation for even higher sales to China -- and the rest of
Asia -- in coming years.
Yet it might be time for a re-think. TheWorld Bank has just
revised its outlook for Asian economies (which you can
read about here
) and the bank's economists have started to grow concerned that the
Asian economic juggernaut is slowing.
Know that these economists are trained to quell any global
anxieties, so the conclusions drawn in their reports will always be
fairly mild. They don't want to sound any alarms, but when they are
talking about Chinese economic growth of 7.7% in 2012 and a rebound
to 8.1% in 2013 -- in sharp contrast to Dow Chemical's Liveris 2%
projection -- maybe you should be alarmed. After all, these bank
economists are working off of data provided by the Chinese
government, which is notorious for delivering opaque -- and often
overly optimistic -- economic reports.
Indeed, a rising tide of investors led by noted short seller Jim
Chanos have suggested that China's economy is in deep trouble.
I noted a series of early warning signs in
roughly a year ago. Chanos and others believe that conditions have
only worsened since then, despite the still-rosy picture provided
by Chinese government economists.
Why does this matter to the United States? Because we now live
in a truly interconnected global economy. Our companies sell
roughly $1.3 trillion in goods and services around the world every
year. And China's fast-rising economy has been the engine for much
of that activity. Let me explain.
As an example, the U.S. sends roughly $30 billion in goods and
services to France every year. And France counts on China as one of
its biggest export markets. If Chinese demand for French goods
slow, then the French economy has less need for U.S. imports that
are used in French factories. Of course, when the global economy is
expanding, this can be a virtuous cycle. But if China's import
needs slow, then it can quickly become a vicious cycle with
negative feedback loops (i.e. falling French demand would slow U.S.
exports, crimping U.S. demand for French imports, etc.)
Manufacturers and farmers at risk
To gauge the impact of a slowdown in China and the rest of Asia,
you need to focus on the types of goods and services this region
consumes. Though a few American brands such as
have made major inroads in China, Taiwan, Singapore, Thailand and
elsewhere in Asia, many U.S. consumer goods providers have yet to
make a big dent. That's why the retail sector wouldn't take a deep
hit if Asian economies sharply slowed.
Yet the U.S industrial sector has ample reason for concern. A
number of Asian factories have imported machines and other factory
equipment from the U.S. to run their assembly lines and process
their commodities. (Dow Chemical, for example, provides the raw
material to make many Chinese plastic goods.)
Let's dial down to a company level and see what a slowing
Chinese economy means.
typically sells $3 billion to $4 billion worth of planes to China
every year, and demand for planes always slows down when
intra-country travel slumps.
- Soybean exports to China swelled toward the $10 billion mark
in recent years, putting money in farmers' pockets to buy
tractors from firms like
- Chinese technology companies have begun selling sophisticated
telecom and computer equipment, but inside their devices you'll
often find chips and other components made by firms like
The Chinese landscape has been one big construction site in
recent years, fueling high demand for
equipment, design services from some of the top U.S. architectural
firms, copper for plumbing provided by
Freeport McMoran (NYSE:
and many other firms.
Yet buried in this doom-and-gloom scenario is a ray of hope
pointed out by those World Bank economists: The decade-long growth
across Asia has created a vibrant middle class that is only
starting to spend on handbags, shoes, cars, movies, iPads and other
items. And the U.S. is still the leading purveyor of the many of
the world's top global brands.
So even as the manufacturing and industrial segments of these
economies are slowing, rising consumer demand may pick up the
slack. Indeed many of these countries -- especially China -- are
trying to shift to an economy based on higher domestic consumption
of goods and services. It won't be an easy transition in the near
term, but could still turn out to be the next driver of global
growth down the road.
Action to Take -->
Many U.S. employers count on China and the rest of Asia for a fair
portion of their sales mix, and an economic slowdown abroad could
lead to a hiring slump here in the U.S. Until we get a better sense
of whether China and the rest of Asia are still seeing 6% to 7%
economic growth -- or much weaker growth as Dow Chemical's Andrew
Liveris suggests -- it may be best to proceed with great caution as
you look out on the world economy in coming months.
This article originally appeared on
Forget The Fiscal Cliff -- Why China May Be
2013's Biggest Financial Headache
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of FCX, NKE, SBUX in one or more if its "real money"
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