Don’t Expect China to Bail Us Out

11/20/2007 12:00 am EST

Focus: MARKETS

Gary Shilling

Columnist, Forbes

Gary Shilling, editor of Gary Shilling's Insight, says Asian consumers don't have the purchasing power to compensate for the likely decline in US consumer spending. 

As housing collapses and consumer spending decelerates-into recession, in our view-most investors hope that the rest of the world will pick up the slack and sustain American economic and stock market growth.

Many are especially trustful that the world's two poor giants, China and India, will replace the US as global economic leaders. US consumer spending is four times that of China and India combined, but in the first half of 2007, consumers in those two countries contributed more to global growth than did their American counterparts.

But can the economies of these and other developing countries continue to mushroom as the collapse in US house prices destroys the home equity on which consumers have depended to fund their spending gains? The hope is that Asian middle classes will propel local economies and also spend enough on imports to offset US consumer weakness and possibly economic sluggishness in Europe and Japan as well.

As US consumers retrench, American imports will suffer two or three times as much, as is normal. And the rest of the world relies on the US to buy those products for which it has no other markets-$819 billion in goods alone over the most recently reported 12 months.

China in particular has had heavy reliance of exports to promote her extraordinary growth. In the early 1990s, China's net exports of goods were around zero percent of GDP, but last year were 8%. And China's foreign trade juggernaut continues to roll. Chinese officials forecast a [record] trade surplus of $250 billion for this year as a whole.

Retail sales in China are growing rapidly, but personal saving in China remains huge, at around a third of incomes, much more reminiscent of pre-industrialized economies than those with big, free-spending middle classes. Ditto for India. High saving rates do imply that their middle classes are small relative to total population and/or are unwilling to spend freely.

Chinese have racked up $2.26 trillion in bank accounts, or 48% of GDP. Households save the equivalent of 20% of GDP and with even bigger corporate saving, gross domestic saving is among the world's highest at 47%.

The likely bursting of the Chinese stock market bubble will probably depress consumer confidence and spending, as well as business investment. Chinese households have around 22% of their financial assets in stocks, compared with 8.6% in 2005 at the end of the last bear market. So the negative effects could be much greater this time.

So, we conclude that the rapid growth of major developing lands, especially China, is still driven by direct and indirect exports to US consumers. Local middle classes aren't big enough yet to generate domestically led growth, much less promote US expansion through massive imports from America. And with US consumers likely to mount a saving spree as American housing collapses, exports to the US, and hence growth in local spending in Asia, will be severely restricted.

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