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Posted : 2010-02-09 16:57
Updated : 2010-02-09 16:57

Chinas Growth: Blessing or Curse?

By Robert L. Eberenz III

On a positive note for Japan, export growth in December surprised economists by growing at 12.1 percent, compared to the 7.6 percent forecast, for the first time since the collapse of Lehman in 2008.

Breaking down the numbers, analysts were equally unsurprised to learn which market was responsible for the rapid growth.

As China's economic growth continued to roar at 10.7 percent in the final quarter of 2009, the third-largest economy has supported export markets, including Japan, Korea, other Asian countries and even Western nations.

Although China has found ways to sustain growth throughout the recession, the majority of consumer markets have been slow to follow suit.

Chinese stimulus can be thanked for the birth of domestic consumerism in China, as households have been given vouchers to buy specific goods, creating demand in centrally targeted industries.

Simultaneously, all levels of government opened the faucet of liquidity, through low borrowing costs and lax loan requirements, which has accelerated the churning out of Western-style real estate for consumers to fill with new products.

The price tag on China's stimulus so far scans just shy of $600 billion, representing 13 percent of GDP in 2008 and well above spending in the U.S. and Korea, which are closer to 5 percent of GDP for each.

As an expat living in Gwangju, Korea, I can vouch for the tangible business expansion that has been rumored to have begun in the East.

The steady export market in China has buffered job losses and allowed entrepreneurs to take advantage of the record low interest rates that have spanned the globe.

The result, through the eye of an American businessman, is a crane filled skyline in motion and downtown retail epicenters furious with life.

It all seems eerily familiar to the consumerism evident in the U.S. from 2004 to 2006, and is founded on an assumption perhaps less ridiculous than the ``forever appreciating U.S. home price" fallacy, but equally as probable.

The new assumption serving as the global economic engine, is that China's 10 percent growth is not only sustainable, but that it will occur for the foreseeable future.

Let's look at some of this ``sustainable'' growth more closely:

― 2008 China's GDP stood at $4,327 billion (source: The World Bank).

― 2009 unrevised China's GDP amounted to $4,910 billion (source: the China Daily).

― China's GDP growth reached 10.7 percent in the fourth quarter of 2009 (source: Xinhuanet).

― 2009 outstanding loans grew by $1,400 billion or 28.5 percent of the GDP (source: The Wall Street Journal).

― 2009 broad money supply expanded by 27.7 percent (source: The Wall Street Journal).

Recently markets have operated under an irrational paradigm where prices don't move until the reality of the situation is forced down our proverbial throat.

Ironically, it seems that the rumors, fears and speculation about asset bubbles in China are enough for the communist leadership to forcefully hit the brakes on loose liquidity expansion.

The Industrial and Commercial Bank of China (ICBC) will curb lending in 2010 by 25 percent, no doubt to moderate the pace of inflation and domestic growth, as it outpaces the anemic recoveries elsewhere across the globe.

This idea that China saw peak economic acceleration in the last quarter of 2009 hasn't sat well with market movers.

While stricter borrowing standards may benefit all, helping to avoid a collapse akin to the U.S. real estate failure, the return to reality has traders scratching their heads for reasons to buy.

Added stress from a reversal in the U.S. housing recovery and a weak demand forecast from multinational Caterpillar and U.S. cell phone chip maker Qualcom have contributed to the past week's decline.

It's fair to say that the global recovery is fundamentally based on strong growth from China, while there is evidence that GDP growth in the cheap U.S. dollar-tied-Renminbi may be eroding sales from global competitors and misrepresenting global consumer demand.

Negative outlook on Japan by Standard & Poors and manufacturing woes in Germany, beg that such fears are rooted in truth. Combining these symptoms with an autocratic body of leadership, resistant to allowing its currency to freely appreciate, has exposed the China-led recovery to criticism.

It isn't hard to distinguish Asia's beating heart, albeit is any man's guess whether the continent's overall return to growth lives or dies.

China is a formidable 1.3 billion-strong populace, the world's third-largest economy, and yet the IMF ranks the nation's per capita GDP 89th.

As blind as justice, markets may now be signaling that the still developing nation cannot lead the globe from the stimulus injected foundations of recovery to global economic expansion. Whether they are right is up to each of us to decide.

Robert L. Eberenz III is editor and senior analyst of Diamond Slice, a financial market analysis service. He can be reached at robert.eberenz.iii@gmail.com.

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