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China Putting World Economy in Reverse

China Putting World Economy in Reverse
(Dollar Photo Club)

Wednesday, 21 October 2015 11:03 AM Current | Bio | Archive

One word is all you need to explain the global economy since 2001. The word is China.

Almost everything that’s happened in the last 15 years relates to China’s transformation into a modern economy.

Why 2001? It’s not because of September 11, though that was important, too. Economically, the bigger event happened three months later. It was December 11, 2001 when China joined the World Trade Organization and began accepting foreign investment.

It worked. Chinese exports soared in subsequent years. So did imports. Beijing soon redefined global trade flows, buying massive amounts of raw materials from other emerging countries. If you can name it, China bought it: iron ore, aluminum, crude oil, coal, rubber, cotton, timber, and more.

Chinese workers used those materials in two ways.

First, they built their country a modern infrastructure. Railroads, highways, airports, dams, bridges, and even entire cities.

Second, they converted raw materials into manufactured goods, and then shipped them to the U.S. and Europe. We all went to Walmart and bought those goods. They were less expensive than American-made equivalents.

This was great while it lasted. Just rinse and repeat.

All good things must end, and this chapter of economic history is running out of pages.

China now has enough infrastructure for the next few decades. Ghostly vacant cities lay ready for occupation by citizens not yet born.

Meanwhile, the U.S. and Europe are digesting the enormous debts we ran up buying all that Chinese Walmart stuff. Our import appetite isn’t growing. Sometimes it even shrinks.

This means China no longer imports as much raw material, and is a prime reason commodity prices have weakened. They will get weaker, too.

This isn’t good for commodity-exporting nations, particularly those for whom China is a top customer. The list includes Brazil, Colombia, Malaysia, Indonesia, South Africa, Turkey and Russia. Currencies from those nations are all weakening because China buys fewer of them to pay for its imports. 

The other side of that coin is that the U.S. dollar is strengthening. That makes our exports more expensive to the rest of the world, thereby limiting our growth.

None of these forces is likely to reverse any time soon. That means the next 15 years will not simply be an extension of the last 15. They will be different.

How so? That’s the trillion-dollar question. How you answer will determine your investment success.

Patrick Watson is an Austin-based financial writer. Follow him on Twitter @PatrickW.

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One word is all you need to explain the global economy since 2001. The word is China.
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Wednesday, 21 October 2015 11:03 AM
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