Simonomics: How China's Money Mess Helps the U.S.
WHY YOU SHOULD CARE
Because some of that money will end up in the U.S., where it may help add jobs and lift bruised stock markets.
By Simon Constable
Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.
Assuming he wasn’t much of a markets investor, baseball great Yogi Berra might have taken some odd pleasure in watching the financial markets unfold lately, if only to repeat his famous goofy line: It was “déjà vu all over again.” We are talking, of course, about the recent meltdown in China, followed by a pretty nasty start to the year on Wall Street, where investors couldn’t have been pleased by an apparent repeat of August’s China-led stock pullback.
But investors are always looking for silver linings, and some may yet find theirs. At least some folks are promising, hoping and praying as much — that roiling markets in China might make for hay in the United States and elsewhere. What’s more, they could be right.
Already, China’s economy has been slowing as it transitions from one focused on exports and construction to one catering to selling goods and services to its own consumers. Such a change will mean more growing pains, and because China is the world’s second-largest economy, many other countries will be closely watching. For instance, investors expect a further depreciation of the country’s currency, the yuan, as the government tries to stimulate some exports to partially aid in its recovery, says Joe Brusuelas, chief economist at professional services firm RSM. Traders are already betting on a devaluation of more than 5 percent this year, he notes, and that kind of a drop will reduce China’s buying power for materials such as iron ore and coal, which puts further pressure on already depressed commodity prices.
There is some silver lining for certain investors in all of this. Much of the capital leaving China will travel directly to mature economies.
China is also seeing what’s known as “capital flight,” where people and companies park their money overseas, leading to lost investment dollars vital for long-term growth. Last year, China saw a lot of cash fly away, and that total will likely top $500 billion, says Hung Tran, executive managing director of the Institute of International Finance. Others estimate even more than that — about $1 trillion of capital outflows last year — and Constance Hunter, chief economist at professional services firm KPMG in New York, notes, “This could be exacerbated if China’s economy is worse than stated.”
Money will keep leaving for a number of reasons, including the fact that the government is introducing limits on how much money people may take out of the country. The problem: That kind of move typically causes more capital flight rather than less. Then there’s the expected devaluation of the yuan, which is likely to encourage even more outflows. Think of it like a bank that promised to pay you back only 95 cents for every dollar deposited. Knowing that, you’d likely want to pull out every last nickel as well. None of this spells good news for China’s economy.
But there is some silver lining for certain investors in all of this. Much of the capital leaving China will travel directly to mature economies such as the U.S. and the European Union. That’s actually already started, according to a recent RSM report. If the trend continues, as expected, the U.S. stock market could get a boost, while money will also get put to work building factories and employing people. In short, it would be a double helping of economic goodness.