Should we fear Chinese economic weakness?

The stock market mess started when China decided to devalue its currency by a paltry 3%. The panic that followed has apparently stopped them from doing more, if they ever had more in mind. Their stock market (if we can call it that) has fallen by 42% after rising spectacularly over the preceding year. That “market” is extremely illiquid and composed of odds and sods that hardly represent their macro-economy.

But even if it were the perfect cap-weighted index with every major company included, why should I care if it fell 42%? Do western banks lend to Chinese companies? No. Do western investors invest in their stocks? No.

If it’s indicative of a Chinese economic collapse, I still don’t care! China buys (virtually) nothing from the west so our companies would lose no orders. Sure Australia would sell them less iron ore but is that what we are so worried about? The question is, how does a decline in an irrelevant economy – spread to the west? What is the transmission mechanism?

Perhaps investors in Japan will get scared by a decline in that market and then we get scared by a decline in the Nikkei -etc etc but that sounds more like a limited decline. Oil prices will fall since China is a huge buyer and anyone with oil stocks or stocks of banks that lend to oil companies will get hurt. There is of course a benefit on the other side- we are all richer since we will save money at the pumps.

There are clear losers: Canada, Russia, Venezuela, Australia, Saudi Arabia etc. but can they cause fear to spread and explode. How much do we care about Toronto real estate or negative Venezuelan GDP? The answer is murky since transmission lines are often opaque so I don’t want to get too cavalier. Perhaps Chinese economic weakness is a symbol of weaker US import demand. China may just be the leech in the coal mine simply telling us that our own growth is flagging.

Wage growth has completely stalled as I predicted it would years ago. No wage growth -> no consumption growth -> no import growth. Competition from Chinese peasant labor has killed the glorious US consumer who they (the Chinese) depend on for work. The cycle is almost complete.

The parasite has sucked too much blood from the host.

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