China in Perspective

Here are some facts found in the Economist that help put China in perspective.

For “several years”, emerging markets have been contributing to global growth more than the USA. So what we are seeing unfold in 2007 is really nothing new.
This year, China will end up being responsible for more of global GDP growth than the USA – for the first time ever.

The American consumer may be 4x the size of the Indian and Chinese consumer put together, but so far this year they have contributed more to global GDP growth than the former has.
How vulnerable are China and India to a US consumer slowdown? Some, perhaps (article suggests that every 1% slowing in US consumer spending results in as much as a 0.5% loss to China’s real GDP growth). But China and most Asian countries now export more to the EU than they do to the USA. And over the past year, China’s exports to the USA have only run at +14%; and to the Eurozone that comparable is closer to 40%.

Many Asian governments are running balanced budgets and as a result will have leeway to stimulate fiscally if need be. China, for example, has just an 18% public sector debt-to-GDP ratio, versus 75% in the industrialized world.

As long as Asian growth remains intact, look for commodity prices to remain firm. After all, emerging Asia accounted fully for two-thirds of the rise in world energy consumption over the past five years.

Exports to account for 40% of China’s GDP, but domestic demand is also so solid that without the foreign trade sector, China’s real GDP would still be 9% so far this year (as opposed to the actual +11.9%).

The Chinese stock market has not entered a bubble … yet, anyway (definition of a bubble is a stock I don’t own). Even though share prices have surged 400% in two years, the trailing P/E is 50x and the forward on '08 estimates is around 30x. P/Es in other classic bubbles like Japan and the NASDAQ breached 100x. The market cap is 35% of GDP compared with 180% in the USA at the 2000 peak. Equities represent 20% of Chinese financial assets versus a 50% share in the USA.

The article downplays inflation risk in China: almost all the inflation is in food; excluding food, inflation is running at +0.9%. To be sure, food is one-third of the price index, but at least the data suggest that the inflation is mostly supply-side led, not demand led. The Economist article takes issue with the labor cost issue -- while wages are up 15% in the past year, unit labor costs apparently are still going down due to still-robust productivity gains.