Sunday, October 18, 2009

China Continues To Drive Global Growth

There can be no doubt at all at this point that the Chinese recovery is real (in the sense that output is expanding significantly). Here are just some of the news indicating this:

-Exports fell by only 15.2% in September from a year ago, the smallest drop in a year. Meanwhile imports fell even less at only 3.5%. Adjusting for the drop in price, real imports likely rose from a year ago. As a result the Chinese trade surplus dropped by more than 50% to $12.9 billion.

-Electriciy consumption rose 10.2%.

-Passenger car vehicle sales in September rose a full 84% compared to a year ago, rising above 1 million (12 million at an annual rate) for thr first time ever, strengthening China's position as the world's largest car market.

The much smaller decline in China's imports was mirrored by a big drop in the rate of decline in South Korea's exports, which fell by 6.6%, the by far smallest amount during the latest year. As Korea's imports fell by 25%, this means it went from a balance in trade to a surplus of more than $5 billion. China's boom will however not only help lift South Korea, but also other Asian countries, and to a lesser extent the rest of the world.

That makes it all the more worrisome that the Chinese boom is partly built on excessive money supply growth, which according to the M2 measure was as high as 29.3%.

While I remain long term bullish on China for reasons explained here, this means that some form of medium term setback looks increasingly likely, which given the current dependence on increased Chinese demand would spread to the rest of the world, particularly other Asian countries.


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