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What Does China Mean to the World?

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March 06, 2012 – Comments (0)

Board: Macro Economics

Author: OrmontUS

The global equity markets have been dinged over the past couple of days over the interpretation of the signals coming out of China that their growth will drop from 8% to 7.5%

I came across this.

China's economy has been playing a greater role in global economy as the outlook for the US and European markets continues to deteriorate. Leading international bank Citigroup predicted on Thursday that 30% of global GDP would be generated by China in 2012, despite its prediction that China's GDP growth will slip (from 9%) to 8.7% next year.

Jeff's note:
Assuming the 9% number is accurate, a drop to 7.5% is a decrease of 17% or a reduction of world total growth (based on China accounting for 30% of total world growth) down by a nominal total of 5%. Well, that's assuming (I think far from a valid assumption) that a drop of this magnitude will not impact other country's growth.

China is properly paying attention to its own interests. It is modulating the value of the RMB to keep its export markets alive, while continuing to maintain the ability to purchase raw materials. It is accelerating internal consumption. While there is an implication that this is a positive outcome for the US and Europe, it will tend to increase costs and inflation outside of China, while allowing them to address their own.

China was taught an important lesson in 2008-2009. They were able to hold their head above water despite our upsetting of the apple cart, but they were still blamed for somehow being responsible (as one of our major creditors). They are working to isolate themselves from future European and US financial difficulties. This, in turn, will possibly play havoc with many of the emerging market countries which depend on China to buy their output.

The world is changing before our eyes. It changes slowly and frequently without such obvious telegraphing as China is doing this week. It is not the world of today which should concern us in our investment plans, but what the world will look like in 2015 which should be in our sights.

What are your goat entrails and tea leaves showing?

Jeff

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