In my last post, I raised the question of whether China is truly worthy of being considered a major economy, and can it be trusted. That post is linked as follows: https://thetruthoncommonsense.com/2016/01/05/is-china-truly-in-the-big-leagues-and-can-it-be-trusted/. Frankly, I do believe that it cannot be trusted on many fronts; but, it seems like its primary problem—when it comes to the financial turbulence that it has now created twice in the past five months—is that its financial leadership is highly incompetent. Keep in mind, however, that China is still a nascent economy, having only been thrust into the major ranks quite recently.
Last week, the U. S. stock market dropped between six percent (Dow Jones Industrial Average and the Standard and Poor’s 500) and with the tech-heavy NASDAQ falling by seven percent. The technology sector has been one of the best-performing sectors over the past several years, and “Growth” companies tend to be more volatile, as compared to the more mature “Value” stocks. So, it’s only natural that a faster-growing sector could be targeted to drop more, perhaps due to profit-taking.
The slump in Europe was comparatively similar; however, the Asian markets were hurt even more, following China’s market decline of 11.6%. Other developing markets and economies that are heavily dependent on the export of commodities (i.e., oil, copper, soy beans, etc.) were especially damaged.
A key problem with China is that the Party’s hierarchy, the Communist Central Party, controls literally everything, including: the monetary policy; the financial markets; the media; the birth rate; the military; many banks and corporations; and infrastructure projects. So, part of their incompetence is that the Party seeks control; but, oftentimes, it does so, based on its own agenda, rather than on market-based interests, or common sense.
China has recently ascended to a number of diplomatic and economic roles: a permanent member of the U. N. Security Council; the World Trade Organization; the Group of Twenty major economies and, most recently, its currency, the Renmimbi will become a “Reserve Currency”, on October 1. But, let’s not forget that its growth to become the second largest economy is, perhaps, mostly due to its 1.36 billion population.
Since last August, the Chinese Renmimbi has declined by five percent versus the U. S. Dollar. Was that China’s wrong-headed attempt to prop-up its economy, to devalue its currency rather than continue to provide jobs building infrastructure projects, and to diversify its economy–beyond low-paying jobs that are oriented toward export, rather than domestic consumption?
And no one—not even the Chinese people—believe the accuracy of any of the reports published by either China or even Chinese corporations. So why did we place so much trust in the foremost emerging Asian Tiger? Is that China’s fault?
We can regard China as a global financial power; however, we should also keep in mind that its economy is certainly not based on real-world market dynamics. Rather, it is a creation of the Communist Central Committee. Yes, China does import $2 trillion of goods—albeit mostly commodities—from abroad; however, that is only a small piece of the overall $60 trillion global economy.
Last August, global financial markets plummeted when China devalued its currency by two percent; but, they quickly bounced back. So, why did we fall into that same abyss once again? China’s Gross Domestic Product, the total value of goods and services produced, has been declining, from 10.6% in 2010, to the current 7.3%. Rut, remember that, when China began its economic boom, some two decades ago, it was starting from literally nothing. So, shouldn’t we have expected an eventual slow-down by now. Well, its here! So, why didn’t we see it coming?