Belt Up for the Year of the Rat

In terms of purchasing power China is now the number one economy in the world. However, when we read financial headlines about monetary policy, Brexit and trade wars there is a tendency to view the challenges facing the global economy through Western-oriented glasses. More bluntly, one could be under the impression that it is in the gift of Western economies to find solutions to said challenges and all will be right with the world. Whisper it quietly to the Donald but 2020, the Chinese Year of the Rat, might not just be about whistleblowers…

Trade wars may grab the headlines but the reality in a US context is less weighty. Goldman Sachs in 2017 published a report which showed the top 500 companies in the US (S&P 500) earned 30% of their revenues overseas. However, China accounted for just 1% of its revenues. In fact, a mere 41 of those companies generate 10% or more of their revenues in China. There is a real possibility that the business world is placing too much significance on the dampening effects of the US-China trade war on economic activity. In this writer’s view market analysts need to be more curious as to why Germany is teetering on the brink of recession.

There is a real possibility that China is facing a structural challenge which Japan has faced for the last 3 decades; the growth-killing combination of a 300% debt/GDP ratio and an ageing labour force which is projected to lose 200 million workers by 2050. These numbers are massive and frankly won’t be changed by Fed monetary policies or the impeached removal of a US President. The global trade truth is that Europe is the largest trading bloc in the world and therefore serves as the canary in the coalmine for China’s impact on all its trading partners. The struggles of the German manufacturing sector tell us there may be a bigger story emerging.

The Belt & Road initiative (BRI), China’s strategy to become a rival super power to the US is a classic example of Sino-long term planning. What has been missed by many, and is possibly now being experienced by German factories, is the sheer scale of this project. Here are a few data points which tell a huge story.

  • The Plan: The BRI strategy involves investment in 65 countries.
  • The Population: BRI countries have combined population of 4.4 billion people or 62% of the world.
  • The Economy: Combined GDP of BRI countries is $23 trillion, larger than the $20 trillion US economy.
  • The Spend: Estimated infrastructure requirements and spend through 2030 is $26 trillion.

Let’s just say all roads lead to China. Or did. There is no doubt the BRI project has been a key driver of global economic activity in recent years but has been very dependent on Chinese credit. Unfortunately, China which has pledged $1 trillion to the BRI project is struggling under a crippling debt pile. There is a strong suspicion that a downturn in Germany’s manufacturing sector is an early warning signal that China is reining in its spend and this will not change irrespective of trade war resolution or central bank monetary interference.

One wonders if the waning influence of Oriental fiscal stimulus is the reason why the ECB is almost begging the Germans and other governments to launch fiscal programmes? The real fear of central bankers is that renewed QE has no economic impact and kills market confidence. If China really does dial down its BRI activity the ECB fears will undoubtedly prove correct. Watch China GDP and credit growth very carefully, not the trade negotiations.

Misplaced optimism on the resolution of US-China trade issues in the Year of the Rat might sink a few ships as well as a Presidency.


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