When China Sneezes...

Posted: Oct 22, 2008 10:23 AM
When China Sneezes...

In the good old days there was a saying that when the American economy sneezes, the world economies catch a cold.

Or something like that.

Here's how much things have changed. Yesterday's Wall Street Journal had a front pager about how the world economies were being beaten down because of a downturn in the economy of … China.

"China's booming economy is cooling more rapidly than most forecasters had expected, undermining hopes that Chinese demand could help keep the global economy humming."

There was a time when we didn't like China very much. Mao was in charge of things. There was that pesky Cultural Revolution. China threatened to invade Taiwan about every other Tuesday. And they were Communists.

They were the Red Chinese. Remember?

If only, we used to say, if only the Chinese would open their markets to foreigner and adopt a market economy. If only they would trade with the West, we used to say, then things would really be much better.

Came the dawn and Mao died, the price of egg rolls didn't go up, China adopted a modified market economy (much as the U.S. Federal Reserve and Treasury Departments have done over the past 60 days), opened their markets to foreigners, and established a massive trading system with the West.

China, according to the CIA World Factbook is a country about the same geographical size as the United States but which has a population of 1.3 BILLION people. That is one BILLION more people than live in the U.S.

The Chinese Gross Domestic Product is about $7 Trillion; a little more than half of the United States' $13 Trillion.

But the United States' economy is mature. If GDP growth gets much over 4% per year, the Fed raises interest rates because inflation is the athlete's foot of mature economies. Once you get it, it is very hard to get rid of.

China's market economy is only about 30 years old and has been growing at better than 10% per year. That has translated into a huge percentage of the population leaving the rice paddies and joining an explosion of a middle class.

Middle class folks in China want the same things that middle class folks want in Colorado: Cars, TVs, Air Conditioners, computers, housing, furniture, money to go to restaurants and clubs, and all the rest.

Western companies have been elbowing each other out of the way to get a toe into the Chinese economic pool. The reason is simple: An enormous population with a growing amount of money burning holes in an increasing number of trouser pockets is what we like to call .. A Market!

American companies from McDonald's to Wal-Mart have beaten a path to China's door to cash in on the Chinese market. China has been eager to play, too. "Made in China" is a tag which is much more likely to be on everything from garden tools to baby clothes than "Made in the USA."

We know that the Chinese government's attention to detail when it comes to things like lead in toys and God-knows-what in baby formula has been a wee bit lax. And we know that counterfeiting everything from DVD movies to watches is a staple of the Chinese economy.

But, hey. We want to do business with 1.3 Billion consumers so what's a little larceny in the grand sweep of things, right?

If Western consumers slow their purchases - as they have already done - and a significant proportion of those purchases were manufactured in China then it stands to reason that the Chinese economy will slow because they won't be making nearly as many things for export as they have been.

It's one thing for the economy of France or Germany to slow to a halt. They have been growing at about the rate of a fingernail for decades. But if the economy of China slows, then it is trouble for every economy in the West.

Welcome to the brave new world. Pass the duck sauce.