Monday, August 24, 2009 0 comments ++[ CLICK TO COMMENT ]++

Everyone depending on China?

The above graphic comes from the freely available edition of Grant's Interest Rate Observer. It depicts the IMF's estimates—who knows how correct these will be?—of the contribution of China to incremental world growth.

If these estimates turn out to be correct, it's a scary-looking chart. IANAE (I'm not an economist) and my history is weak but when was the last time one country generated 70%+ of world's GDP growth? Maybe USA after WWII? I don't know but I suspect it would have been very rare.

This is a scary situation because, if China runs into problems, as I think it will (although timing is uncertain), the whole world is going to have serious problems. The only saving grace might be the fact that this is on a PPP basis. The share is likely lower on a nominal basis, which is probably more important in this case (I'm not sure.)

In terms of investing, this means that most market participants are likely betting their rosy forecasts on China continuing its growth. Indeed, one can observe very strong commodity price rallies almost entirely based on China's forecasts. Bloomberg recently had a story on commodities reporting that "...based on 2010 analyst estimates that call for profits to almost double..." Commodity businesses are very cyclical, and they are coming off a profit collapse, so it's hard to say, but my opinion is that a 100% EPS growth in an year seems extreme.

My guess... everyone betting on China to save them are going to be in for a shock.


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