Will China Save the World Economy?

The Chinese economy has been a powerhouse of manufacturing for years. China has grown significantly and surpassed Japan to become the world’s second biggest economy—right below the U.S economy.

But today it’s a different story. The debt crisis in eurozone has put the Chinese economy under scrutiny. The eurozone was the biggest trading partner of China, but now with its outlook so bleak, trade between the eurozone and Chinese economy has fallen significantly. China’s exports to the eurozone fell 16.6% in July compared to a year ago. (Source: Global Times, August 30, 2012.)

Manufacturing in the Chinese economy has now contracted for 11 months in row—the longest decline since 2004. Chinese factories are slowing down.

The slowdown in the Chinese economy is widespread and the government is taking action constantly to deal with it. China is a major player in the global economy; any slowdown in the global economy affects its prosperity.

In China, there have been interest rate cuts in June and July and the Chinese government has been injecting cash into the Chinese economy to combat the forces affecting its growth. China has also lowered the reserve requirement by banks and freed about 1.2 trillion in yuan.

Now the Chinese government is stepping in and showing some willingness to help out the countries in eurozone, which comes as no surprise at all. China is willing to buy eurozone bonds if the countries are able to find a balance between fiscal austerity and economic stimulus.

Why would China do such a thing?

The reasons are simple. In order for China to grow, it has to make sure that the eurozone gets out of the debt crisis. The eurozone getting out of the debt crisis would mean increases in demand and more trade between China and the eurozone.

This reminds me of back when U.S economy was facing troubles and the Chinese government came in and bought our debt.

Certainly, America cannot afford to do what China does, coming to the aid of the eurozone. America simply doesn’t have the money to bail out the eurozone, as we are already knee-high in debt. The U.S economy is certainly affected by the slowdown in the global economy, but this time we can only be a spectator.

But the problem with China is getting true statistics out of its statistics offices. If China helps the eurozone, where will the money come from? Will it pull from its reserves of U.S. dollars? One thing we do know about China is that its central bank has become a big buyer of gold bullion. China will likely surpass India this year as the world’s biggest buyer of gold.

Three things are happening here. China’s economy is growing at its slowest pace in years. The country wants to help the eurozone (lend it some money) and China is buying gold. Where is this all leading? If I didn’t know any better, I’d think it means getting out of U.S. dollars and into gold.

Where the Market Stands; Where it’s Headed:

Patience is a virtue, dear reader. And those investors who have had the experience of riding the bear market rally higher since March of 2009 are the same investors who need the patience to see the market put in its top. In technical analysis terms, the stock market is working on putting in a major market top. And we’re almost there.

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in Profit Confidential, February 25, 2008. By the end of 2008, the rest of the world was realizing the recession would be much longer and deeper than most had realized.