Forget The Fiscal Cliff -- Why China May Be 2013's Biggest Financial Headache

posted on 06-07-2019
Every September, the world's top thinkers get together in support of President Bill Clinton's "Clinton Global Initiative," an organization that identifies global problems -- and solutions. At the many panel discussions held at this past month's conference in New York City, key concerns were spelled out, and it was an easy to miss a small comment made by Dow Chemical (NYSE: DOW) CEO Andrew Liveris.
While the Chinese government -- and many economists -- speak of an economy that is growing 7% this year, Liveris pegs that rate at just 2% -- at best. He should know: China is now Dow Chemical's biggest customer.
For that matter, a rising number of U.S. companies have been counting on China and its neighbors for sales growth as Europe -- America's longstanding top trading partner -- has stumbled in recent years. In 2011, the U.S. exported more than $100 billion in goods and services to China, and many companies have been laying the foundation for even higher sales to China -- and the rest of Asia -- in coming years.
Yet it might be time for a re-think. The World Bank has just revised its outlook for Asian economies (which you can read about here) and the bank's economists have started to grow concerned that the Asian economic juggernaut is slowing.
Know that these economists are trained to quell any global anxieties, so the conclusions drawn in their reports will always be fairly mild. They don't want to sound any alarms, but when they are talking about Chinese economic growth of 7.7% in 2012 and a rebound to 8.1% in 2013 -- in sharp contrast to Dow Chemical's Liveris 2% projection -- maybe you should be alarmed. After all, these bank economists are working off of data provided by the Chinese government, which is notorious for delivering opaque -- and often overly optimistic -- economic reports.
Indeed, a rising tide of investors led by noted short seller Jim Chanos have suggested that China's economy is in deep trouble. I noted a series of early warning signs in China roughly a year ago on our sister website, Chanos and others believe that conditions have only worsened since then, despite the still-rosy picture provided by Chinese government economists.
Why does this matter to the United States? Because we now live in a truly interconnected global economy. Our companies sell roughly $1.3 trillion in goods and services around the world every year. And China's fast-rising economy has been the engine for much of that activity. Let me explain.
As an example, the U.S. sends roughly $30 billion in goods and services to France every year. And France counts on China as one of its biggest export markets. If Chinese demand for French goods slow, then the French economy has less need for U.S. imports that are used in French factories. Of course, when the global economy is expanding, this can be a virtuous cycle. But if China's import needs slow, then it can quickly become a vicious cycle with negative feedback loops (i.e. falling French demand would slow U.S. exports, crimping U.S. demand for French imports, etc.).
Manufacturers and farmers at risk
To gauge the impact of a slowdown in China and the rest of Asia, you need to focus on the types of goods and services this region consumes. Though a few American brands such as Nike (NYSE: NKE) and Starbucks (Nasdaq: SBUX) have made major inroads in China, Taiwan, Singapore, Thailand and elsewhere in Asia, many U.S. consumer goods providers have yet to make a big dent. That's why the retail sector wouldn't take a deep hit if Asian economies sharply slowed.
Yet the U.S industrial sector has ample reason for concern. A number of Asian factories have imported machines and other factory equipment from the U.S. to run their assembly lines and process their commodities. (Dow Chemical, for example, provides the raw material to make many Chinese plastic goods.)
Let's dial down to a company level and see what a slowing Chinese economy means.
  • Boeing (NYSE: BA) typically sells $3 billion to $4 billion worth of planes to China every year, and demand for planes always slows down when intra-country travel slumps.
  • Soybean exports to China swelled toward the $10 billion mark in recent years, putting money in farmers' pockets to buy tractors from firms like Deere (NYSE: DE) and others.
  • Chinese technology companies have begun selling sophisticated telecom and computer equipment, but inside their devices you'll often find chips and other components made by firms like Intel (Nasdaq: INTC).
  • The Chinese landscape has been one big construction site in recent years, fueling high demand for Caterpillar's (NYSE: CAT) equipment, design services from some of the top U.S. architectural firms, copper for plumbing provided by Freeport McMoran (NYSE: FCX) and many other firms.
Yet buried in this doom-and-gloom scenario is a ray of hope pointed out by those World Bank economists: The decade-long growth across Asia has created a vibrant middle class that is only starting to spend on handbags, shoes, cars, movies, iPads and other items. And the U.S. is still the leading purveyor of the many of the world's top global brands.
So even as the manufacturing and industrial segments of these economies are slowing, rising consumer demand may pick up the slack. Indeed many of these countries -- especially China -- are trying to shift to an economy based on higher domestic consumption of goods and services. It won't be an easy transition in the near term, but could still turn out to be the next driver of global growth down the road.
The Investing Answer: Many U.S. employers count on China and the rest of Asia for a fair portion of their sales mix, and an economic slowdown abroad could lead to a hiring slump here in the U.S. Until we get a better sense of whether China and the rest of Asia are still seeing 6% to 7% economic growth -- or much weaker growth as Dow Chemical's Andrew Liveris suggests -- it may be best to proceed with great caution as you look out on the world economy in coming months.