Can China Lead The World Out Of Recession?

I chuckled as I read the following article China to lead the world out of recession.

• BEFORE the bear market started in 2007, many were worried that the New York Stock Exchange (NYSE) was priced for perfection. (comment: back in 2008, some folks arrogantly insisted Dow could even hit 18k! guess who? :p2 ) In such a situation, any disappointment can cause the market to trip as everything is going smoothly and expectations are high.
  
  Now, the opposite is happening – the NYSE is priced for massive destruction. In such a situation, a series of positive surprises can cause the market to reverse its bearish trend as everything is going wrong and expectations have gone down the drain.
  
  So, for those who are market-timers and top-down followers, what should one be watching for? What can cause the NYSE to reverse its trend?
  
  The current pessimism in the US is very severe. This is not surprising, given the persistent problems facing the large US and European financial institutions.
  
  The basic reason for this deep level of pessimism is that many of those who are bearish see the current US economic problems as being a balance sheet problem – too much leverage and plenty of bad assets – as opposed to the more usual excess inventory, monetary tightening-type.
  
  Those who based their pessimism of the US economy and thus the NYSE on this approach are not wrong. The excess leverage undertaken by the households and financial intermediaries and the declines in asset prices have caused the balance sheets of many economic units to be out of whack. There is thus the adjustment process going on now.
  
  Some of those who are bearish do not see the US economy growing in 2009, 2010 or even beyond. This is already like the Great Depression. Where i Capital differs from the perma-bears is on the severity and duration of the current economic contraction.
  
  i Capital would agree with the perma-bears if the global economy had only the US, Europe and Japan as sources of growth.
  
  The global economy in the 21st century is undergoing its biggest transformation ever, led primarily by China. While 30, 20 or even as recently as 10 years ago, the US economy could ignore the rest of the world, nowadays, it cannot. The US economy has become very integrated with the rest of the world.
  
  Before the Lehman Panic hit in September 2008, the US economy was still growing decently, thanks to its billions of exports to the rest of the world. Since memories are so short, i Capital shows this dependence by the US on the global economy

Memories.

It was just a year ago that Tan Teng Boo declared that Warren Buffett is a lousy cconomist!. I really wonder if iCapital views were truly consistent?

Look at where we are now. Ouch! So much for that cheap shot fired at Warren Buffett for being a lousy economist!

Anyway the article then continues.

• The most important component of the i Capital Long Boom is China’s once-in-a-millennium transformation. This is still going on despite the US-led financial crisis.
  
  Many are calling a recession for China in 2009. i Capital does not buy into this extreme pessimism. As China and its hundreds of millions of consumers spend their way out of the global recession, this will ensure that China enjoys another decent year of GDP growth.
  
  More importantly, this will benefit the rest of the world, particularly CLEB (China-led economic block), directly or indirectly.
  
  This China-led global recovery will substantially help the US export sector but more importantly, it will provide great confidence to the rest of the world that the decoupling theory is more than still alive.
  
  This new-found confidence in the global economy will permeate many levels and many sectors of the global economy. What is important about this renewed confidence is that it will allow the current vicious cycle in the US financial markets and economy to be broken. Once this negative cycle is broken, a decent and sustained round of economic expansion can begin. Once this happens, the drag from the balance sheet woes will be offset and subside.
  
  Drops in asset prices can be bearable. Not having regular income from having regular jobs is not. The balance sheet recession can be mitigated substantially if the income flows continue.

How I am so confused? When did China became a nation of consumers?

And of course, I have no idea what icapital meant by 'This China-led global recovery will substantially help the US export sector ..'

Since when US export sector was ever an issue? Isn't US a nation of consumers???

Did I get up from the wrong side of the bed this morning?

Can China really spend their way out of global recession??????

I really do not know what iCapital is talking about once again.

I would agree with Professor Walden Bello comments on The Coming Fury In Asia!!!.

• The Illusion of "Decoupling"
  For several years China has seemed to be a dynamic alternative to the U.S. market for Japan and East Asia's smaller economies. Chinese demand, after all, had pulled the Asian economies, including Korea and Japan, from the depths of stagnation and the morass of the Asian financial crisis in the first half of this decade. In 2003, for instance, Japan broke a decade-long stagnation by meeting China's thirst for capital and technology-intensive goods. Japanese exports shot up to record levels. Indeed, China had become by the middle of the decade, "the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia, and Australia."
  
  Even though China appeared to be a new driver of export-led growth, some analysts still considered the notion of Asia "decoupling" from the U.S. locomotive to be a pipe dream. For instance, research by economists C.P. Chandrasekhar and Jayati Ghosh, underlined that China was indeed importing intermediate goods and parts from Japan, Korea, and ASEAN, but only to put them together mainly for export as finished goods to the United States and Europe, not for its domestic market. Thus, "if demand for Chinese exports from the United States and the EU slow down, as will be likely with a U.S. recession," they asserted, "this will not only affect Chinese manufacturing production, but also Chinese demand for imports from these Asian developing countries."
  
  The collapse of Asia's key market has banished all talk of decoupling. The image of decoupled locomotives — one coming to a halt, the other chugging along on a separate track — no longer applies, if it ever had. Rather, U.S.-East Asia economic relations today resemble a chain-gang linking not only China and the United States but a host of other satellite economies. They are all linked to debt-financed middle-class spending in the United States, which has collapsed.
  
  China's growth in 2008 fell to 9%, from 11% a year earlier. Japan is now in deep recession, its mighty export-oriented consumer goods industries reeling from plummeting sales. South Korea, the hardest hit of Asia's economies so far, has seen its currency collapse by some 30% relative to the dollar. Southeast Asia's growth in 2009 will likely be half that of 2008

And in another posting China's Stimulus Strength To Drive Decoupling Theory???

Can China really consume all that they produce?

Mentioned in Chinese And Indian Shoppers Can't Substitute Missing US Shoppers

• Bank of China vice president Zhu Min forecast that Chinese domestic consumption will grow at about 20 per cent in 2009, the same pace as last year.
  
  On the other hand, he noted that US consumer spending is set to plunge 10 per cent, or US$1 trillion (US$1 = RM3.61), due to the financial crisis, as consumers are hit by falling home values and a credit drought.
  
  Americans normally spend about US$10 trillion domestically a year, or about 70 per cent of the US gross domestic product, estimated Zhu.
  
  In comparison, Chinese spend just US$1.5 trillion worth on goods and service, about 38 per cent of GDP.

Can China Adjust To The Lack Of Spending From US?

• Given that the US economy is about 3.3 times the size of China’s, and China’s trade surplus is roughly equal to one-half to two-thirds of the US trade deficit, the increase in Chinese demand needed to equilibrate the increase in US household savings is equal to roughly 10-15 per cent of China’s GDP. With consumption accounting for less than 50 per cent of China’s income, Chinese consumption will have to rise, in other words, by more than one-quarter. This is clearly unlikely.

Can the new infrastructure projects create enough job and wealth to substitute the missing US orders? Can it offer new jobs to the 20 million rural workers who lost their jobs? Yes 20 million people!!!! Ever wonder how small 20 million is? See 20 Million Rural Workers Lost Their Jobs In China!

Here are some excellent editorials from some really smart people.

• China Nears Recession Point As GDP Slumps
• China's Manufacturing Sector Continued To Contract In January
• All but the kitchen sink?
• Hooray! China has bottomed out.
• On China's Plunging Imports
• What ABout China's Drop In Export Numbers?

A couple days ago, Professor Pettis wrote the following Did China experiencing January hot money outflows? ( His website is blocked in China! Go figure!) Here are two important passage from his write-up.

• Where does that leave us? There are about $40-50 billion in unexplained outflows and however you look at it there it is hard to believe that we haven’t seen at least $20-30 billion of hot money outflows in January. From my many years experience in developing markets I should say that the informational content of hot money flows is often wider than many people at first think. Much of the discussion about whether Chinese businessmen are bringing in or taking out money hinges on their perception of whether or not the currency will appreciate or depreciate (and in spite of the popular view of evil foreign speculators masterminding the flows, the truth is that the vast majority of this money is likely to be controlled by local businessmen).
  
  But I would argue that usually a much bigger driver of hot money flows is the local perception of risk in the country experiencing the flows. If hot money is flowing out of China, it could be because local business owners believe the currency will depreciate, but I think it is more likely that the flows represent their concern that local investment opportunities – for example their businesses – have become increasingly risky and uncertain. Hot money flows tell us at least as much about risk perceptions as they do about profit opportunities, especially when the world is in trouble.