With investors fixated on the open-ended crisis in Europe,
fretting about how it may affect their investments here in the
United States, they may be overlooking another emerging troublespot
. Halfway around the world, the Chinese
has begun to slow, and the
and depth of the current slowdown could have a clear impact on the
rest of the world's economies -- and U.S. stocks.
In short, a soft landing would be well-tolerated by the global
could be devastating. Chinese government officials have begun to
take steps to recharge the economy, including a cut in inter-bank
lending rates, but they may have less control over this massive
ship than they think.
Soft and getting softer
Recent data points out of China bring to mind the old adage that
"when the United States sneezes, the rest of the world catches
a cold." But this time, it's Europe that is making China reach for
the Kleenex. European economies have slowed sharply in recent
months, with most of them now in
. Across the continent, it looks as of the euro zone will contract
by 0.6% in the fourth quarter. As Europe accounts for 30% of all of
China's exports, making it the country's largest trading partner,
it's no surprise Chinese factories are starting to feel a
On the surface, China's export sector looks OK. Exports rose
10.9% in November, compared with a year earlier. Yet that's down
from 15.9% in October. Exports are growing, but at a rapidly
Speaking at a news conference recenly, Iwan Azis, an official
with the Asia Development Bank (ADB), told an audience in Hong Kong
that "things are changing very rapidly -- not just weekly and
daily, but hourly." The ADB lowered its outlook for regional
economic growth in 2012 from 7.5% to 7.2%, but cautioned that the
rate could actually be closer to 5% if European economies remain
weak in 2012.
The wildcard is China, which is a major trading partner of
virtually every other country in Asia. As China feels the effects
of a receding Europe, its economy will need fewer intermediate
goods that Asian neighbors provide, possibly setting up a vicious
cycle of negative feedback loops. That's why these next six to
eight weeks are crucial. Coming data points will reveal just how
much of a slowdown investors should expect.
What does itmean for the U.S. economy -- and your stocks?
Plenty. China is our third-largest export
after Canada and Mexico, and we're on track to ship $100 billion
worth of goods to China in 2011. That's up from $92 billion in 2010
and $69.5 billion in 2009. In fact, from 2000 to 2010, U.S.
exports to China grew by 468%, which was more than eight times the
56% growth in exports to the rest of the world. Items such as
Intel's (Nasdaq: INTC)
Smithfield Foods' (
pork products and
jewelry are all selling in increasing volumes to China. A slowing
Chinese economy figures to blunt the steady export growth.
But the psychological result of a slowing China could be even
greater. That country needs to keep generating robust economic
growth to keep its restive population placated. Many citizens are
frustrated by a stifling and corrupt bureaucracy, but have
tolerated this as long as job opportunities and wages keep rising.
Chinese policy makers fear an economic slowdown -- and a possible
in unemployment -- would spark social unrest. Moreover, China's
banks are said to be carrying a rising tide of
defaulting loans on their books
, a trend that would be exacerbated by an economic slowdown. A
troubled Chinese financial sector would have ripple effects around
Right now, most Wall Street economists predict the Chinese
economy will expand by 8% or 9% in 2012. That's starting to look
unrealistic. If China's growth cooled to 7%, then the U.S. economy
would take the trade impact in stride, as it seems to handle all
kinds of global blows these days. But a growth rate closer to 5%,
which would lead to social instability and bank bailouts, is a
scarier prospect, according to China watchers. This rate implies a
global economy that will struggle to expand in 2012, as China had
been expected to be the engine that powers global trade in the year
ahead. This is just one more bullet that investors may have to
dodge, and if China indeed slows at an accelerating pace, then it
may be time to reduce your exposure to U.S. stocks.
Risks to Consider:
Predictions that the Chinese economy is on the cusp of a
slowdown have been in place for a while, but have yet to
materialize, so the most dire predictions may not come to
Action to Take-- >
We live in a globally interconnected economy, so one trading bloc
can inflate or deflate economic activity elsewhere at a rapid pace.
Europe's troubles threaten to drag China, the United States, Japan,
Brazil and others down if the current troubles deepen. Even as you
keep an eye on Europe, it's important to stay focused on China and
protect your investments accordingly.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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