China’s economy is slowing. Like with the U.S., when they have economic problems it trickles down to other countries that are affected. There are many goods, like iron ore, coal, and food that once were made in China but now are imported from other countries. These things are still being made there but in much lower quantities. Like we talked about weeks ago, the pollution and environmental problems long ignored by the Chinese are really catching up to them now.
Let’s quickly look at each of these industries to see how. The iron ore, there is high quality and low quality out there. Since China has already exhausted its supply of high quality ore, they need to import it. This has benefitted South Africa, Iran, Brazil and Australia. The decreased production of iron ore, lower prices and less overall need are killing this industry in China. Coal, only low quality is produced in China so higher quality must be imported (Indonesia has benefitted from this). New regulations on pollution have affected both the iron ore and coal industries negatively. Additionally, new more efficient mining techniques are making it less expensive to import the goods from other countries that utilize them (Brazil & Australia). Finally, the food. The Chinese don’t trust and don’t want to eat their own food given the quality concerns. So they are importing that too, coupled with more people consuming more food.
Countries that have benefitted from this include Brazil, Uruguay and Argentina among others. This is hurting all the domestic industries that produce these goods in China, and throw in the strengthening currency, significant inflation and rising wages and you have serious issues. What it does is take away the cost advantage in production that China has had for some time. If this continues, it will lead to reduced prices for raw and industrial materials, which is good for the rest of the world. This leads me to article number 2, the glass is half full. In the U.S., thankfully our economy is heading in the right direction. This is very evident with the tapering by the Federal Reserve of the bond buying stimulus. They have been reducing it by $10 billion dollars per month, putting it on course to end in October or December. If you see this stop or reverse course it would be a very bad sign, but it is continuing. Like with China, this is producing ripple effects in the economy as investors who were seeking higher foreign returns are now putting their money back here in hopes of higher interest rates. Turkey is specifically a country mentioned that is hurt by this, as they count on a lot of foreign investment.
Things are happening very quickly out there in the world economy today, and it interesting to see who how and why other countries are affected by the moves made by China and the U.S. I am very happy with the overall direction on the economy and hope it gathers momentum in the coming months. I am curious to hear what you think. Thank you for reading as always and have a safe and excellent weekend.
As China’s Economy Slows, the Pain Hits Home
http://www.nytimes.com/2014/01/30/business/international/as-china-slows-the-pain-hits-home.html?_r=0
Citing Growth, Fed Again Cuts Monthly Bond Purchases
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