What are the headwinds facing China that could slow economic growth, but still could lead to China growing faster than the U.S. Also, what is going on with Turkey and are other emerging market countries vulnerable to the same plight?
In this episode you’ll learn:
- What are valuation differences between the U.S. and China..
- What is a balance of payment crisis.
- What is driving the current economic crisis is Turkey.
- What headwinds does China face that make it more vulnerable.
On this episode of Money For the Rest of Us, David examines China and asks the question, is China or the United States more vulnerable? He explains why economic predictions for countries are tough to make, especially for very short periods of time, and discusses the complex topic of “balances of payments.” David also outlines why he believes China to be more economically vulnerable than the US and how China can keep their economy growing in a healthy way.
Economic predictions are tough to make, especially for short time periods
A listener of Money For the Rest of Us proposed this question for this episode. He asks David, “Which country would economically bleed quicker, China or the US?” In response, David considers how China’s economic and political system might impact their level of economic success over the next decade. Irrespective of how China evolves over the next decade, accurately predicting whether the Chinese stock market will do better than the U.S. stock market over the next two years is extremely difficult.
What is a “balance of payment” crisis?
Stephen Cecchetti explains balance of payments as, “An accounting identity stating that net cross-border flows of goods and services, the current account, must be matched by net flows of financial claims.” Simply put, if one country is importing more than it is exporting from another country, it must find a way to finance the difference.
There’s also a flip side to this situation, such as what is happening with China. China is operating on an “current account surplus” because they are exporting more than they are importing. This additional income is then uses to purchase US Treasury bills and bonds. David explains why emerging markets such as those in China and Turkey are both similar and vastly different, and how this all relates to each country’s level of economic vulnerability.
Why is China more vulnerable than the US?
There are 3 main reasons why David believes China is ultimately more economically vulnerable than the United States. The first being because of heavy state intervention. The more government intervention occurs, the less productive companies are able to be. The second reason is that of huge debt balances that are continually increasing. Much of this debt is also being misallocated into primarily state-controlled companies. The United States, however, does a much better job of allocating capital. It’s not a top-down approach. Finally, the population growth of China is slowing and there are fewer workforce aged employees available. These 3 factors combine to form an economically vulnerable China.
China must do this in order to keep their economy growing
In order for China to avoid becoming more vulnerable and allow their economy to grow, they have two choices. David explains that China can either export their way out of their current situation, but given their current account surplus status, this may be very difficult as the other countries would be unwilling to have China account for 40% of the world’s trade export. Or, China can turn inward. David says, “They’re going to have to increase productivity, the output per worker, because the workforce growth is slowing, and it’s hard to increase productivity when you have a misallocation of capital, huge debt balances, and state intervention. And that is the weakness of China.” For the full story on why China is economically weaker than the United States, be sure to listen to this episode of Money For the Rest of Us.
Episode Chronology[1:07] Is China or the US more vulnerable to economic downturn?
[4:55] Why have emerging markets done so poorly recently?
[8:51] The concept of balance of payment is reviewed and examined in a case study of Turkey
[16:20] Emerging markets are doing better than in previous years
[20:35] The 3 reasons why China is more vulnerable than the US
[22:25] What China has to do in order for their economy to continue growing quickly
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