Our session with Leland Miller of the China Beige Book highlighted the lag between the received view of the structure of China’s economy (= Wall Street), which highlights manufacturing through the lens of financial markets, and the structure we emphasize using the framework of economics. Manufacturing is down, the stock market is down, the sky has fallen. Or … of course manufacturing growth is down. And by the way, financial markets aren’t tied much to the real world.
Mark Spiegel at the SF Fed makes this point by looking at the link between shifts in the service sector, the core of China’s economy, and imports. In short, there is none. Now that’s scant reassurance for miners of iron ore or markets in petroleum. Ultimately the Fed’s focus is the US economy, so that’s their concern. It is a nice confirmation, however, of the fundamental shift in the economy as incomes rise and the urbanization process slows.
Note the link to a NYTimes article by Nick Lardy, who has followed the Chinese economy carefully for longer than anyone in China. That doesn’t mean he’s 90. It instead is a sad testimony to the deleterious impact of the Cultural Revolution on education and more generally the side effects of the politicization of life on the ability to undertake such analysis inside China.
I experienced the paranoia surrounding the Chinese markets last summer, working on the energy desk of an Investment Bank. In the globalized world we live in today, all the markets are interconnected and a shift in pricing can throw the whole circuit in to a loop. Prices in the Chinese Stock Exchange are superficial , as the governing body surrounding the institution are often highly involved in the timing of sales of equity stakes. The sky is not falling; China is just transitioning to a more sustainable form of growth and economic expansion, which disrupts the financial scenario we’ve all grown accustomed to as the growing region exploded on to the global financial scene throughout the last decade.