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China
is among the world’s fastest-growing economies.
Shanghai and Shenzhen are home to its hottest stock market. Now many
investors regard the evolving Asian behemoth as the
antidote to a slowing
US
economy, picking up the slack in global growth as the
American consumer retreats.
They
probably shouldn’t. China’s growth has been fueled by
exports and investment, not consumers, whose share of
the country’s gross domestic product (GDP) is declining.
From almost 80 percent in the first half of the 1980s,
Chinese household consumption fell to 46 percent of GDP
by 2000 and shrank further to 36 percent in 2006.
“The
average consumer in
China
isn’t a credit-card-toting shopper roaming malls in
search of fashionable jeans or a large-screen
television,” says Joseph Quinlan, New York-based chief
market strategist at Bank of America Capital Management.
Instead,
the Chinese are savers. The average household banks a
quarter of its after-tax income. That’s to compensate
for reduced government outlays for health care,
unemployment benefits and pensions; more costly housing;
the loss of guaranteed lifetime employment; and rising
school-related expenses in a country obsessed with
education.
“While
China’s global presence in certain industries has grown
in significance over the past decade, Chinese consumers
are not ready to drive global demand,” Quinlan says.
“The Chinese are in no position to fill a consumption
vacuum left by the US.”
China
is part, a big part, of a growing consensus that
emerging-market countries cannot only break free of
their traditional dependence on the American consumer
but that their own expanding domestic demand can cushion
the global impact of a slowing US economy.
‘Consensus view’
Proponents of this thesis that the meek shall inherit
the Earth—or, at the very least, help stabilize
it—include Goldman Sachs Group Inc., Merrill Lynch & Co.
and Lehman Brothers Holdings Inc.
Strong
growth in emerging markets “could balance the drag
effect from the world financial turmoil,” Lehman told
clients at the end of August. On September 12, Goldman
economists boldly proclaimed: “Our view of global
decoupling has become the consensus view.” Emerging
markets generally and the so-called BRICs—Brazil,
Russia, India and China—specifically, are key to global
decoupling, they said.
The four
BRICs, which sport growth rates of 5.4 percent to 11.5
percent, may be the toast of the evolving economic
order. But declaring them the new citadels of the world
economy is a stretch and premature.
Too
small
Although
developing countries are projected to account for about
three-quarters of global growth in 2007, their size is
still too small to power the world economy. Take the
four BRIC nations: collectively their GDP amounted to
$5.6 trillion at the end of 2006. That’s 43 percent of
US GDP, 56 percent of the 13-nation euro area’s and 130
percent of Japan’s.
When it
comes to stock markets, the gap is even wider. The
aggregate free-float value of the Brazilian, Russian,
Indian and Chinese stock markets is a mere 4.9 percent
of world- market value, according to Morgan Stanley
Capital International. The four BRICs are 12 percent of
the US market value, 16 percent of Europe’s and 56
percent of Japan’s.
China’s
CSI 300 Index has more than tripled in the past 12
months. Still, the country’s stock market represents
just 1.9 percent of total world-market value compared
with US equities’ global share of 42 percent.
Even
though developing countries are trying to boost domestic
demand, they remain dependent on exports, accounting for
about 45 percent of the world’s cross-border sale of
goods, according to Merrill Lynch.
Japan’s slowdown
Furthermore, the Japanese and German
economies—respectively, the world’s second- and
third-biggest—are slowing, adding to the woes of
emerging-market exporters already thumped by weaker US
growth. Japanese GDP fell an annualized 1.2 percent in
the second quarter, and there’s a good chance the ruling
Liberal Democratic Party, eager to remain in power, will
backslide on promised fiscal changes.
Meanwhile, Germany suffers from sluggish consumption, a
strong euro that threatens exports, and a credit crisis
that will increase the cost of financing investment.
No
doubt, developing countries have come a long way since
the 1997-98 Asian financial crisis and the Russian
default in 1998. Back then, Asian countries were starved
for cash; now emerging-market economies, led by Asia,
account for 66 percent of global foreign-exchange
reserves. Inflation is down. And many countries have
adopted flexible-currency regimes.
‘Vulnerable economies’
As a
group, the countries’ total external debt-to-GDP ratio
has been falling since 2000. And the aggregate
current-account surplus of 54 countries studied by
Goldman Sachs rose to 4.7 percent of GDP in 2006. That
compares with a deficit of 1.4 percent of GDP in 1995.
Nonetheless, “there are still plenty of vulnerable
economies in the emerging-market space,” says Gray
Newman, New York-based senior Latin America economist at
Morgan Stanley. South Africa, Turkey, Hungary and the
Czech Republic have run current-account deficits
averaging more than 4 percent of GDP for three years,
while Turkey, Poland, Hungary and India have posted
fiscal deficits of 3 percent to 8 percent of GDP in the
last three years.
What’s
more, “before we ring in the decoupling era, it is worth
recalling that it has not been tested with a US economy
in recession,” Newman says.
Bottom
line: “The old saying, ‘If the US sneezes, the rest of
the world catches a cold,’ remains relevant,” said the
International Monetary Fund in its April 2007 edition of
the World Economic Outlook.
How much
of a cold depends on how big the sneeze. |
