A crash of at least a downturn of the economy in the US, compared to the recession in Japan, is becoming more likely. But opinions on what such a downturn will mean for China differ very much. There are at least two schools: one says that the global effects will be so devastating, it will for sure affect China's economic future greatly, since it depends for a large degree on exports to the US and other parts of the world that will be affected by an economic crash. One of our Chinabiz Speakers, strategy analyst Paul Denlinger, defends that position.
A radical different position is taken by for example Paul French, who recalls the Japanese downturn and remembers how Chinese manufacturers took advantage of that.
We are old enough, and very long in what is left of our teeth, and we remember when you could shop all day in a booming Tokyo and never see a Chinese made product. Japan boomed and China didn’t get much of the action. When Japan went pop, consumers traded down, ¥1,000 stores and discounters boomed, cheap-and-cheerful chains such as UNIQLO flourished and stores filled up with made-in-China goods. Put simply, the Japanese recession was good news for Chinese manufacturers.
Both schools have solid arguments against their predictions. In a recent report by UBS, here reproduced by All Roads Lead to China, the contribution of export to China's economic development is discussed. Basic export figures greatly misrepresent the value of the section of the economy, while domestic demand is undervalued. When the export is not that important for China, that would of course also diminish the effects of a US downturn.
Will the US economic depression have a positive effect on China's economy, as Paul French argues? That is also unlikely, because unlike the Japanese stores when its downturn took off, the US stores are already filled with cheap Chinese goodies. So, if there are any positive effects, it might be limited to some specific industries. As living in the US, with few exceptions, is impossible without a car, it might force the American consumers into the despised but cost-effective Chinese cars. But most of the Chinese manufacturers seem to have entered the US market wherever it is possible.
How disruptive a downturn in the US would be depends largely on the speed of that downgrade. Japan could go downhill economically for more than a decade and would still be internationally in a good position. I think a US downturn would not be a gentle glide, more a quick crash. That would diminish the value of the US dollar (and the Chinese reserves) very fast, but also here the effects would be limited, because of the closed financial system. It would only prove to the financial authorities that saving money is not always a good Chinese tradition. Otherwise, effects on China seem fairly limited.
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