In the discussion we linked to yesterday (well worth your time, by the way, if you are interested in matters military and strategic), George Friedman argued that although China has made a Great Leap Forward beyond anything Mao could have imagined, it is now reaching a point of economic fatigue, if not exhaustion. In particular, he pointed out that China’s manufacturing system produces far more than China itself can possibly consume, and so its economic security depends very sensitively upon the fiscal health of Europe and the United States. A serious collapse in those interlocking markets would be very bad indeed for China; perhaps far worse than for the consumer nations themselves.
In this morning’s KGS NightWatch, analyst John McCreary made the same points:
China: The Ministry of Commerce said on 16 November that China’s exports are feeling pressure from global economic uncertainties. A spokesman said the ministry cannot be optimistic about the export situation during the coming period, citing a downshift in global economic recovery, a downgrade of the US credit rating and the expansion of the European debt crisis. He said that frequent protectionist measures and trade disputes have had a “relatively large influence” on China’s exports and that these issues, along with rising costs at home, have complicated China’s foreign trade outlook.
Comment: The Xinhua report is significant for several reasons. First it disclosed that the Chinese government expects that the credit rating of the United States will be downgraded. Second, the Chinese economists predict a contraction of the global economy. Finally, the Chinese anticipate a contraction of globalization as the result of protectionist policies, in other words, a reassertion of economic nationalism. The Chinese seem to expect that the export markets for cheap Chinese manufactures will shrink and the prices for raw materials will rise.
The apparent Chinese linkage of the US credit rating to the European debt crisis implies that the Chinese know or believe that US banks have much greater exposure to European sovereign debt than they have admitted. The Chinese assessment evidently is that Europe will drag down the US.
One Chinese economist, a professor of finance at the Chinese University of Hong Kong, recently wrote that the Chinese banking system is nearly bankrupt already and China’s Gross Domestic Product is declining, but the Chinese are hiding the data. He wrote that “every province in China is Greece.”
This note is a warning to hedge bets in China in 2012.