Why What Happens to the Chinese Economy Is Critical to America

The Chinese experiment is over—at least that’s what some in the financial media are saying. Well, guess what? It’s not over, but there will be hurdles along the road for China, as the country struggles to drive its domestic consumption and make sure the economy doesn’t tank. 

The reality is that what happens in China is critical to America and the global economy. In fact, I will go as far as to say China is an increasingly important barometer for global business. 

That’s why I closely monitor what is happening in the country, due to its impact on the U.S. economy. Trust me when I say that if China’s gross domestic product (GDP) growth was still growing at double digits, things would be much better than they are at this stage—but they are not. 

I was just reading that the country has dictated that more than 1,400 companies spread across 19 industries will need to cut their respective excess production capacity in 2013, according to Bloomberg. (Source: “Beijing orders 1,400 firms to cut capacity,” China Economic Review, July 26, 2013.) 

Eliminating excess production capacity is simply another way of saying that China is expecting its GDP growth to stall, perhaps even more than many expect. So, maybe we will see a sub-seven-percent GDP growth reading in China. This order by Beijing clearly indicates there could be more bad news on the horizon and it could end badly. 

Moreover, you also have to wonder: how accurate is the GDP growth reading out of China? Who knows? But given all of the recent economic evidence of slowing in China, I wouldn’t be surprised if the GDP growth was already below seven percent. 

If this is the case, then you also have to wonder if the global economy is as good as some are suggesting in terms of growth. Maybe the 1.8% first-quarter GDP growth for America wasn’t an aberration, and we need to be worried.

And to make matters worse, if you discount in the inflation, the real GDP growth declines to essentially zero, based on the annualized 1.8% inflation in June, as reported by the Bureau of Labor Statistics. That’s no growth folks, despite the massive stimulus.

Simply put: the United States is in trouble, and the situation in China is really beginning to be problematic. 

All I can say is to closely monitor China. 

The reality is that if China is stalling, so is the United States and other regions in Asia, Europe, and Latin America. All of that money in the pipeline, and the economies are still at a standstill.

~ by George Leong, B.Comm. 

This article  was originally published at Investment Contrarians