The recent hiccups on Wall Street were blamed by the media and many Wall Street analysts on a faltering Chinese economy. The logic follows that as the Chinese economy shrinks, they will reduce U.S. imports which would negatively impact the U.S. economy. They are wrong.
The following table shows U.S. exports and imports to and from China for the first six months of 2015. For every $1 of goods China buys from the U.S., China sells us $4 of goods. Since these data are for just six months, they are simply doubled to estimate an annualized rate.
Let’s assume a worst case scenario in which China ceased all purchases of U.S. goods. What impact would that have on the U.S. economy? The answer is not much. As shown above, China is on track to buy $111.8 billion from the U.S. this year. The latest estimate of U.S. Gross Domestic Product (GDP) as of Q2 2015 is $17.84 trillion, annualized. That means that China’s purchases make up just six tenths of 1 percent of the U.S. GDP. With a currently estimated growth rate of 3.7 percent, the U.S. GDP would still have been an impressive 3.1 percent – assuming China bought absolutely zero from the U.S.
Not all that China buys from the U.S. is high-value added goods either. Almost 12 percent of the total purchases in 2014 was soybeans. More than 20 percent was food, agriculture or alcohol related.
So who do I blame for the stock markets jitters? The Federal Reserve, as they have kept interest rates too low too long. At these low interest rate levels, there is very limited demand for buying notes and bonds. That gave conventional investors two primary investment alternatives: stocks or real estate. Most people went the stock route, with demand outstripping supply, resulting in an over-valued stock market. Simple supply and demand came into play once again. China was merely a convenient scapegoat for the drop in equities.
To view historical Chinese balance of trade data from the U.S. Census Bureau click https://www.census.gov/foreign-trade/balance/c5700.html
To see what China buys from the U.S. click https://www.census.gov/foreign-trade/statistics/product/enduse/exports/c5700.html
So what should the Fed do? Raise rates – and they should have done so last June.
Just my two cents.
Ted