How Can China Grow Economically If Not Via Exports?
There is a simple solution to all of the above: growth. economic growth.
But the problem for China right now is: the old way(s) of growing the Chinese economy can no longer be relied upon.
Here is why:
A few weeks ago we wrote a friend and thoughtful fund manager a simple question:
"How will China grow, if not via exports?"
He wrote back "great question" and that was that. We were hoping for more!
We will be honest with you, dear reader. We aren't sure we have a great answer either. We are sure that it is a big and important question however, so let us do our best.
As this newsletter and every news outlet is reminding you, Americans are buying fewer goods. You can see this best perhaps in the plummeting revenues (and forward guidance) from the likes of Walmart and Amazon.
Both mega retailers have experienced 20%+ falls in their share price (before recovering) and while there are a few drivers for such large and complex businesses the fact that people are buying less "stuff" is at the center of it.
There are a few reasons for this decline in consumption, of course, and most should be familiar to you:
The pandemic surge of shopping for "stuff" has reversed as people spend more on experiences and services outside of their homes.
Also, in industry after industry we have seen the nasty "bullwhip effect" as huge demand suddenly evaporates as the market responds and supplies suddenly surge.
The Federal Reserve has sharply and consistently raised interest rates which has dramatically changed the cost of credit and hurt the consumption of goods.
High inflation means that people almost by definition can afford to buy less. Staples and especially food and energy are eating into the household budgets and overall leading to less "bang per buck."
But now, we are buying less stuff and the Fed is likely to ensure that, at least over the short to medium term, we will be unable to buy more!
A central bank pivot - if it ever actually happens! - to a lower pace of interest rate hikes might take the foot off the neck of the global economy and allow heavily stressed debtors and their investors to get some breathing room but it does not equal another stimulative consumption boom. Far from it.
Add it all up and it seems highly likely that dramatically higher Chinese exports aren't coming back any time soon.
Perhaps the best indicator of all this has been the collapsing shipping rates:
The cost of shipping a 40-foot container from Shanghai to Los Angeles, California has plummeted from well over $10,000 to barely over $2,000 and beneath its long term average.
Remarkable.
Say what you will about the US Federal Reserve and their missteps when it comes to inflation and the pandemic but it seems clear that their interest rate hikes of the last 8 months have effectively helped to crimp most goods inflation, but not yet, as this newsletter has outlined previously, the inflation in services.
The problem is that selling goods to the West has been the core of China's economy for well over a generation now. That and the property sector - another form of reinvesting savings - has been the primary engines of Chinese growth.
If those engines sputter then the question becomes, what, if anything, can take its place.....
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