Obama should pray that China overtakes US
By John Authers
Fellow Financial Times columnist Niall Ferguson has received some fierce criticism for a piece he wrote in Newsweek, under the provocative headline: “Hit the road, Barack”.
Among various complaints, critics cried foul over a graph showing that the International Monetary Fund predicts that, on current trends, China will overtake the US to have the world’s largest economy in 2017.
On that basis, China should be causing sleepless nights in the White House. The latest flash estimates for China’s purchasing manager data, designed so that 50 should be the dividing line between expansion and recession, are now at a nine-month low of 47.8.They have a point. Nobody disputes this claim (in a chart headed “A nation losing ground”). But this event would be no indictment of US economic policy under President Obama, or his predecessors. China has four times the population of the US; parity would mean that Americans were still on average four times richer.
Indeed, US business and the US economy desperately need China to keep growing. Mr Obama need not be embarrassed when China’s economy overtakes that of the US; but he should lose a lot of sleep over any suggestion that China might fail to do so. - THIS IS IT NOT A STOIC VIEW LACKING IN DEPTH AND VISION.
Western analysts are notoriously nervous of official Chinese data. However, commodity prices are something of a truth teller. Iron ore prices, driven almost exclusively by Chinese demand, have fallen by a third since April. Copper prices are also mired in decline.
Stock markets, too, are raising red flags. China’s domestic stock market is the most eye-catching. The Shanghai Composite index this week dropped to a low last seen in March 2009 – the month the developed world’s stock markets started their great recovery. It is down 66 per cent from its 2007 peak, and has underperformed the S&P 500 by 32 per cent since the beginning of last year. - WHO ARE THE DRIVERS OF THE CHINESE STOCK MARKET? THE COMMON MAN WADING IN THE RICE PADDY (?) … THE IMBALANCE IN POPULATION BETWEEN THE USA AND CHINA IS AN ILLUSION WHEN IT COMES TO THE ECONOMY … ESPECIALLY A GLOBALLY ECONOMY. THE LARGEST SINGLE PURCHASE AN AMERICAN FAMILY MAKES IS THEIR HOME … WHAT IS THE PENETRATION RATE IN CHINA OF HOME OWNERSHIP, AUTOMOTIVE, ETC.
True, Shanghai stocks enjoyed a classic speculative bubble in 2007. Their collapse follows a pattern typical after such incidents. (Charts showing how similar the Shanghai bubble was to the earlier Nasdaq bubble are to be found on the FT’s Long-Short blog). In any case, stock market growth is not closely tied to economic growth, at least on a year-by-year basis.
But then look at how woefully Chinese stocks open to western investors, as represented by the MSCI China index, are underperforming MSCI’s index of US stocks. Since the beginning of last year, they have underperformed by 26 per cent. But this measure is also imperfect. Big US companies are themselves heavily exposed to the Chinese economy.
When western stocks are analysed by their exposure to the Chinese economy the problem becomes most apparent. Deutsche Bank’s baskets of large European stocks, divided according to their greatest international exposures, show that China-exposed companies have underperformed US-exposed stocks by 40 per cent since the end of 2010. This is chiefly driven by mining companies, who cannot counter investors’ alarm about China’s attempt to refocus growth away from investment projects and towards consumption.
Miners’ share prices already appear adequately to discount the low materials prices, and indeed seem to be projecting them far into the future.
Globally, materials companies have underperformed developed world stocks as a whole by 20 per cent since the beginning of last year, according to MSCI indices.
Some sectors fare better. Luxury goods companies, also heavily exposed to China, have been doing fine. - A SIMILAR MENTALITY EXISTS IN INDIA WITH REGARD TO GOLD, WHERE FAMILY WEALTH IS DISPLAYED AND WORN FOR EVERYONE TO SEE
But this is not just an issue for miners. The grain of what executives in other industries are telling their investors suggests that they, too, are concerned about the consequences of investment decisions in China. In combination with the political risks in Europe and the US, this has led many decisions to be postponed.
Goldman Sachs produces a quarterly “beige book” compiling managements’ comments during their investor briefings. One of the clearest themes of the latest edition is concern over global growth, which largely comes from China. Caterpillar, for example, said that it was lowering production there and intended to cut production further.
The greatest hope of optimists among executives, at least as parsed by Goldman, is that China can rebound and execute its growth shift successfully. United Technologies, for example, rhapsodised over the possibilities for growth in demand over the next 15 years. IBM reported very strong growth in computer sales.
The upshot for the US is clear. Everyone needs to be offering up a prayer that China does indeed overtake the US on schedule, three years from now. That would help Americans grow richer.
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