Emerging Market Strategies

Limitations to Stimulus: Inflation in Emerging Markets

William Gamble — Sun, 27 May 2012 14:39:02 GMT

As a result of the recent elections in France and Greece the latest mantra among European leaders is that their policies have to change from austerity to growth. There is one problem. One has to wonder what exactly do they expect to use to stimulate growth? There are two standard ways. One would be to try and stimulate their economies using fiscal policies. They could either cut taxes to encourage people to spend or the governments could increase spending on government programs. Both would stimulate the economy, but for most European countries these two options are out because they already have exceptionally high debt.

Another way to stimulate growth is to use monetary policy by cutting interest rates or more exotic programs with less proven records like quantitative easing. These might work except that all of the countries have already used these tools. Interest rates are near zero and the European Central Bank pumped a trillion euros into the European economy over the winter.

Perhaps the best way to promote growth would be to require structural reform and limit government over regulation especially of the labor market. But this has two problems. First it would take time to show results and second no self respecting European would ever continue working after the age of 62 or give up their spa leave. So it is politically impossible. So Europe’s policy makers and central bankers are trapped. Without viable solutions, Europe will be subject to an inevitable slowdown. Not to worry, emerging markets will save us.

Since the beginning of the great recession in 2008 the emerging markets have been the engines of the global growth. With youthful populations, relatively low debt levels and expanding middle classes, these countries seem set to drive global growth indefinitely. But there is a problem. Despite the happy predictions of analysts and economists all over the world, no economy can escape from business cycles and some of the economies in emerging markets are showing distinct signs of stress.

While inflation is not an issue in the developed world, it is in many emerging markets. One of the worst is Vietnam.Vietnam is one of the fastest growing countries in Asia. Its GDP increased by over 8% a year from 2003 to 2007. While it has slowed recently, it is still expanding at 6%, a rate that would be the envy of most governments. Sadly the price to pay is Asia’s highest inflation rate. Last year it topped 20% for the second time in three years.

Turkey and Poland are two large emerging markets on the periphery of Europe. Unlike Greece and Portugal, these two countries have been growing rapidly. Poland did not even experience a recession. Turkey declined in 2009 but bounced back to growth over 8% for 2010 and 2011. Both countries have benefited from large investments in foreign capital, but both countries have large exposures. Turkey is now running a scorching inflation rate of 10.4%. But the real problem is its current account deficit in excess of 10%. This makes Turkey vulnerable to capital flight.

Poland’s inflation rate is only 4%, but it is heavily dependent on its exports especially to Germany. So it is not only exposed to European problems but also problems in one of Germany’s largest trading partner, China.

It is not just the smaller emerging markets that are experiencing problems. India’s economy is slowing. The Reserve bank of India (RBI) felt secure enough in March to try and stimulate the economy with its first interest rate cut in three years. Sadly the RBI’s actions were premature. Inflation increased from 6.89% in March to 7.23% in April, so any further monetary stimulation is probably not in the cards.

And then there is China. China’s growth, upon which much depends, is definitely slowing, perhaps more than investors expect. What investors do expect is that if China slows, the government will step in and use its control of the economy to get it restarted. But like other countries China is also limited in it policy responses. New loans or ending real estate market restrictions would lead to more unaffordable empty houses and increase the mountains of bad debts.

While investors around the world wait breathlessly for the next stimulus from governments in developed countries and emerging markets alike, the reality is that government policy options are quite limited. They cannot undertake a fiscal or monetary policy to make things better without making other things worse. European stimulus wouldn’t ignite inflation, but it would exacerbate sovereign debt problems. Most emerging markets don’t have the debt problems, but they do have severe inflation, which has to be tamed. The paradox is that the one policy that politicians will not follow is the one policy that would actually work, the path of true reform.

Its Not Europe: Credit Issues in Emerging Markets

William Gamble — Sun, 20 May 2012 15:09:31 GMT

It’s all about Europe. Every day we read and hear in a never ending stream about the problems in Greece. If the story is not about Greece, then it is about bad debts in the periphery countries of the EU including Spain, Portugal, Italy and Ireland. The sovereign debts of these countries are supposed to be shaky and the holders of their debt, including many banks, could be in real trouble.

Isn’t it all a bit passé? I mean we have been hearing about this since I wrote my first column over two years ago. One has to ask whether these problems were any better or worse six months ago last fall? I doubt it. Despite the European problem markets all around the world have done rather well. The S&P index has increased over 10% even with its recent correction. The German index, the DAX, is up 23% since its lows of last September. There are debt problems lurking in the world economy, but they are somewhere else.

The best way to track a potential credit crisis is to look for a recent credit splurge. A good place to start would be Asia. Asia certainly has had its share of credit recently. It helped fund a period of exceptionally high growth, but like the housing bubble in Spain, high growth tends to mask problems.

To find the largest problems it is perhaps best to start with the region’s largest economy, China. China’s real estate bubble has been threatening for a long time. It has between 10 to 65 million vacant properties. Whole cities are vacant and unused. In addition there are an estimated $464 billion worth of bad loans to local governments. Bad debt ratios for Chinese banks could be as high as 30%. But China is not alone.

The Chinese economy has an enormous impact throughout Asia especially on commodities producing countries like Australia. According to Societe Generale strategist, (uber-bear) Albert Edwards, “Australia, at its simplest, is a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China.” Australia has not had a recession since 1991. Like the housing bubble in the US, Australians have assumed that the past growth in housing prices will continue indefinitely into the future. The result is house prices have risen 300% since 2000, 100% more than in the US at its peak. Unlike the US, Australian house prices have not corrected.

But it is not just East Asia. India’s problems with high commodities prices, a falling rupee, and high interest rates are severe. According to a survey of 100 bankers by the Reserve Bank of India, bad loans are the most significant risk to the financial system. No bank is more exposed than India’s largest bank, the State Bank of India. Like other state banks in emerging markets it invested in infrastructure at the encouragement of its political owners. Infrastructure is invariably a pit of corruption and waste.

The economic boom in Brazil has slowed, but the credit growth of over 25% per year has left many problems. Last year Brazil reported the highest default rate in nine years. One of the largest Brazilian banks, Itaú Unibanco, increased its provisions for bad debts by 38%.

Turkey’s credit has been growing at more than 30% which helped fuel its economic expansion. But now households are stuck with a debt to disposable income ratio that has risen from 35% to 45% in the past two years.

Not to leave anyone out, last year the Russian state and a large state owned bank bailed out the Bank of Moscow to the tune of $14 billion. Even in Kenya credit to private households has increased by 32% in 2011, creating another potential credit bubble in one of the world’s poorest countries.

This is a globalized world. So a problem in Asia or in emerging markets is not just a problem for local banks. Citigroup in the US gets more than half of its profits from emerging markets. The Spanish bank, Banco Santander, has a large presence in Latin America and recently had a 32% surge in loan losses in Brazil. Both Standard Charter and HSBC have large exposures to Asia.

Many analysts are quick to assure investors that banks in emerging markets are well capitalized and there isn’t anything to worry about, but how do they know? Banks in Europe have gone through two stress tests to determine their risks, yet estimates of bad loans keep rising. The regulators in Europe are reasonably honest and independent from politicians. In addition they are regulating mostly private banks. In emerging markets both the banks and the regulators are often subject to the whims of the state. So the size of the credit problems that actually lurk on their balance sheets may eventually make Europe’s problems look quite small.

A Manager's Tale: Managing Earnings Expectations

William Gamble — Mon, 14 May 2012 21:08:41 GMT

As earnings season in the US winds down, investors might be feeling rather optimistic. It seems that companies, especially US multinationals, have again exceeded expectations. Over 79% of them have posted earnings per share that beat analysts’ forecasts. This is an exceptionally high number of “beats”. It is on a par with the record set for the third quarter of 2009. It is also far better than the average ‘beats’. In a typical earnings season over the past 20 years just 62% of companies exceed analysts’ predictions. The question is why?

It is easy to understand why companies would beat expectations in 2009. The global economy was just beginning to recover from the disaster that started in the fall of 2008. The financial community was reeling from a brush with catastrophe. It is reasonable to expect cautious forecasts. The present number might be harder to explain.

One possible reason was that the pre-earning guidance provided by companies in the first quarter was very negative. Companies cutting their guidance outnumbered companies increasing it by two to one. The last time this happened again was in 2009, but in the first quarter when the global economy was falling apart. With companies issuing negative signals, the low estimates were predictable.

With such distortions we might suspect that managers were intentionally massaging their guidance. Certainly they have large economic incentives to do so. Convincing the market that the company is doing better than anticipated often results in a rise of the stock. Since many executives are also compensated in stock, a bit of a boost never hurts provided that the market actually believes you. This season it was more skeptical. Exceeding analysts’ estimates usually results in a 1% rise in share prices. This time stocks only rose 0.5% for a ‘beat’.

One of the economic incentives to manipulating expectation is not so much to create dramatic surprises, but to create a sense of stability. According to a recent survey 96.9% of CFOs prefer a smooth earnings path. A nice earnings graph without spikes or troughs can mean less perceived risk which translates into lower costs for capital, better credit ratings and more credibility with investors.

This is especially true for firms which can present earnings as exhibiting a pattern of consistent earnings growth. The core competency of Jack Welch, the former CEO of GE, was manipulating earnings. His reputation and fame are based on his skill at being able to “manage” quarterly earnings. He was able to deliver 15% earnings growth every quarter for many years. Not only did he deliver consistent growth but also managed to slightly exceed expectations.

Corporate guidance is a perfect example of asymmetric information. Management has it and you don’t. So one of the ways that quality corporations can increase their value is to signal their ability to consistently forecast and achieve growth. This increases their reputation relative to competitors and other players. Companies with the best reputations, for example those on Fortune’s America’s Most Admired Companies List, are more likely issue more frequent and more precise forecasts than do other companies. The most admired company, Apple Inc., has missed estimates only once since 2007.

The credibility of guidance depends not only on the reputation of the company but also upon the type of news itself. Good news is treated by the markets quite differently from bad news. Markets tend to be skeptical about good news, which partial explains the muted reaction to this quarter’s positive earnings numbers. Apparently the market suspects management’s motives.

Bad news on the other hand is considered far more credible and the market has a much greater reaction. Although the likely credibility is equal for both types of news, bad news can push a company’s stock down by as much as 10%. Since management realizes that bad news has a greater potential to spark a selloff, the incentives are greater to err on the upside when releasing a negative forecast. Perhaps the greater reaction to bad news has more to do the cognitive bias of loss aversion which is people's tendency to strongly prefer avoiding losses probably twice as much to acquiring gains.

Reducing asymmetry with better disclosure varies a great deal throughout the world depending on the local regulatory regime. Foreign companies listing in New York through ADRs often will voluntarily disclose to increase their reputation. Interestingly disclosure from some companies from the emerging markets of Brazil and India will disclose more than companies from more developed countries. Firms from Denmark, Finland, Greece, Hong Kong, Japan, South Korea, Portugal, and Spain, do not issue any guidance. Firms from Israel, India, Norway, Singapore, and the Philippines issued both more often and more accurate.

Perhaps the inaccuracy of companies’ guidance last quarter has less to do with motives than the world economy, which due to massive interference by unpredictable governments, is far simply harder to predict.

Corporate Earnings and the Illusion of Emerging Market Growth

William Gamble — Tue, 08 May 2012 20:37:40 GMT

If there is one thing that gets investors, especially American investors, excited it is when CEOs announce with great fanfare that their companies are going international. Most investors view international expansion as the perfect solution for saturated markets in developed countries. They see vast potential in billions of potential new customers who are equipped with all the amenities of the home market but are not sufficiently served. Without any meaningful competition the company can embark on a voyage of profitable conquest into this brave new world.

Recent examples would include the much hyped move of Netflix into Latin American. The stock hit a new high. There was only one slight little problem. Since most Latin American countries lack the high speed internet infrastructure, Netflix streaming technology is useless. Starbucks stock rose after the announcement of plans to expand in Germany and its intent to produce an home coffee machine capable of making espresso. Its main competitor is the giant Nestle who already has a well established Nespresso machine. These are also established markets and there is not a single Starbucks store in all of Italy.

If CEOs really want to impress analysts and investors these days all they have to do is to hint of expansion in China and other emerging markets. With dynamic economies, low debt and great demographics these markets are supposed to return consistent growth for the foreseeable future. Certainly this has been true in the recent past and it is certainly true in this earnings season.

For example Kimberly-Clark’s North America sales fell as consumers bought cheaper generic products. In contrast sales were up by double digits in emerging markets. Chinese revenue increases were the highest at 45% with Latin American and Russia growing strongly at about 25% each. GE, Honeywell, Yum! Brands, McDonald’s and Coca-Cola all had over double digit growth in emerging markets in some cases the growth was over 100% for GE in Russia.

Car companies are falling all over each other to build new capacity in China in hopes of strong growth. Nissan plans to invest over $400 million. Ford is investing $760 million. Volkswagen is building a $270 million plant in the western Chinese city of Urumqi and even Renault has just signed a letter of understanding with Dongfeng Automobile.

But there is one problem with all of these earnings expectations and forecasts. Emerging markets including China are slowing. For example although car sales in China grew by 35% in 2010, they only increased by 5.2% in 2011 and they actually fell by 3.4% in the first quarter of 2012, a real problem since the forecast was for a 8 to 10% growth for the year.

China’s growth while still rapid has fallen steadily from over 10% in 2010 to 8.1% in the most recent forecast. In line with some predictions, China has started to reinflate with increased bank loans. However with demand softening in its major markets in Europe and the US, the extra stimulus has nowhere to go and makes inflation worse.

And China’s slow down is hardly unique among emerging economies. All of them have growing problems. Brazil was once one of the stars of the emerging markets. It recovered rapidly after the crash as growth topped 7.5% by the end of 2010. Its market increased over 90% from its lows in November 2008. However its economy is now stagnating. Its growth rate in 2011 was 2.7% and its economy actually declined in January. The central bank cut Brazil’s Selic interest rate to 9% its lowest level since April 2010 and only 25 basis points off its 15-year low of 8.75% despite inflation running at 5.5%.

India is also slowing. Its growth rate is still rather strong at 6.1% but this is a marked slowdown from 2 years ago when it was over 9. Like Brazil the central bank recently cut interest rates by 50 basis points to 5.5%, but also like Brazil this could help reignite inflation currently running at over 9%. Inflation heats up; both countries could be forced to slow their economies further.

Part of the problem for emerging markets is that many are dependent upon other economies. Exports to China contribute 1% or greater to the GDP growth of Russia, Indonesia, Korea and Brazil and about .8% to Germany. China also is the export market for over 20% of the exports of Taiwan, Australia, Korea and Japan and 17.3 % of Brazilian exports. So as one emerging market slows, so do they all.

To the extent that we believe earnings forecasts by analysts and companies, record earnings are supposed to continue this year and next. With Europe’s problems far from solved, an anemic American economy and now rapidly slowing emerging markets, the probability that these forecasts will be anywhere near accurate is zip.

Brand Stewardship in Emerging Markets

William Gamble — Sun, 06 May 2012 14:57:34 GMT

The growth of emerging markets are having an enormous impact on everything. However marketing and brand management in these markets can be a bit of a challenge. This is true for both multinational companies attempting to sell into these markets as well as for emerging market companies competing with them and attempting to expand internationally.

One of the most interesting examples are brand named luxury goods. The sales of these products grew 13% in 2010 to $228 billion and another 10% in 2011to $252 billion renewing the growth trajectory started in 2007 when sales hit a previous record of $224 billion. As with all things concerning emerging markets, sales in China have led the way. Sales of branded personal luxury items purchase by Chinese globally add up to a whopping $52 billion. This is 80% of the $63 billion in sales of the largest market, the United States.

But China is not alone in its tastes for brand names. Latin Americans led by Mexicans and Brazilians are raiding the posh stores of New York, Milan and Paris with reckless abandon. Local markets are growing as well. Sales in Brazil grew 50% from $2 billion in 2009 to $3 billion in 2011. Sales grew in the same period by 12% in the Middle East and by 25% in Korea.

But catering to these markets often means adapting to local tastes, which are often quite different than in Europe or the US. For example Chinese women’s taste for whisky and sports cars is higher. In China Maserati sells 30% of its cars to women, while in the west women buy only 2 to 5%. In contrast, Chinese men purchase more far more grooming products including face creams than in older markets. They also are large consumers of luxury bags. Coach sells $1.7 billion worth of leather bags in China, 45% to men compared with 15% globally.

Despite the local demand, Chinese and other emerging market firms have not, with a few exceptions, established their own brands. Instead they have often tried a short cut, purchasing western brands. This process has even been sanctioned by the Chinese government.

But government encouragement does not necessarily mean success for the Chinese any more than it did for their Japanese predecessors who did the same thing 30 years ago. The computer firm, Lenovo Group, purchased IBM’s personal computer business in 2004. Lenovo now sells computers under its own brand and the only thing left of the IBM brand is the name ThinkPad. The problems with the IBM brand have not stopped the Chinese from buying others. The Chinese car company Geely bought Volvo last year and a Chinese bulldozer manufacturer bought the Italian luxury yacht marker Ferretti owner of the legendary Riva boat brand. Not to be out done, one of India’s largest industrial group, Tata, purchased the famous British tea company Tetley and more recently Jaguar Land Rover.

Still marketing success has proven elusive even on their home turf. Chinese car companies have been unable to pry the more lucrative parts of their own market away from VW and General Motors. The foreign branded cars are seen as more reliable, stylish and a better value than their Chinese competitors. This leaves the Chinese car makers with the low end of the markets where competition is only on price and margins are razor thin.

Emerging market governments are all ambitious to make their mark in the world and have no problem supporting their locals. In China this means reviving a bit of socialist history with the Mao era Red Flag Limousine. Like its Soviet counterpart the Zil, it was originally produced for the communist leadership in 1958. But it fell out of favor with the Chinese leadership who preferred the more polished Audi, which dominates 30% of the market. Discontinued in 2010 it is now back as the first choice of the upper echelons of the party.

But the main problem for China and other emerging markets in learning the art of marketing is the protection of the brands themselves. The Chinese governments, usually local governments trying to protect home grown industries, have been ruthless in slandering foreign brands. Luxury brands including Hermès, Hugo Boss and Tommy Hilfiger Chanel, Armani, Christian Dior, Zara and Burberry have been attacked as substandard. Wal-Mart in Chongqing found itself the scapegoat for high pork prices, while Coke, Heinz, Procter & Gamble General Mills, Lipton teas, Colgate-Palmolive all have been accused of selling adulterated products.

Besides slander, the Chinese are notorious for intellectual property violations and trademark infringement. This consistent disregard for property rights was supposed to damage multinational firms, but the real losers are in China. For without these basic protections, the locals can only hope to produce basic commodities and leave the more profitable higher end to foreigners.

Stagflation with Chinese Characteristics

William Gamble — Sun, 22 Apr 2012 16:12:05 GMT

China’s GDP numbers last week confirmed suspicions that China’s economy is slowing. But not to worry, the central bankers of the world will ride to the rescue. Every investor has been conditioned better than one of Pavlov’s dogs to expect that any indication of a slowing economy will bring in another acronym for printing money. Investors will react with a risk rally that will temporarily mask the real problems. The rallies last until the next set of figures again confirming a basic paradox. For wads of additional stimulus to actually promote growth it has to actually go somewhere productive. It hasn’t. In the US the money has simply gotten stuck on corporate balance sheets and encouraged additional profligate government spending. In Europe it has had a similar effect. Banks used the money to buy government bonds, delaying the need for painful adjustments.

The monetary manipulation in developed countries has many harmful side effects especially to underfunded pension funds to say nothing of pensioners, but at least they have been achieved in market economies. In China flooding the market with more cheap money has an even larger perverse effect, because of the nature of the system.

An example of the problems with the Chinese political economy is how they choose their leaders. The Chinese Communist party uses as system known as paoguan. It means to “run around for titles”. In essence at promotion time members of the party make tribute-paying visits to higher-level officials. In China this process is in high gear. The change of leadership means that offices in 31 provinces and province-level municipalities, 361 cities, 2,811 counties and 34,171 townships will be reshuffled among 80 million members of the party. Many of these offices have vast discretionary power and their decisions can be very lucrative.

A selection process based on paoguan also creates a perverse allocation. Government officials are not chosen by either merit or their appeal to public interest, but by their abilities to manipulate a corrupt system. Patronage and pay off become more important than the actual ability to do the job.

The same problems exist with the Chinese stimulus. With state owned banks, loans are directed by the state and the state is run by a system of patronage. This guarantees that any stimulus package that the Chinese produce will to go to the wrong place. The unprecedented amounts of stimulus money in the form of massive bank loans went to inefficient state owned business and local governments. Neither have any intention of paying the money back.

Of course the good news is that state owned banks have a monopoly. They can generate large profits even with mounting loan losses by paying lower interest rates to captive depositors. This means slower growth, but the financial system remain solvent. Until now.

The Chinese are well aware that the distortions have slowed growth. To change, they are attempting to gradually reform parts of the system. One such reform is an experiment in the ever entrepreneurial city of Wenzhou.

Since small and medium sized businesses, the more efficient parts of the economy, were excluded from the state banking, a shadow banking system grew to cater to the need. The Wenzhou experiment extends legitimacy to the system. But there is a catch to reform. If the Chinese legitimize private banks, then the state owned banks no longer have a monopoly and must compete for depositors. Depositors like their western counter parts will shop for yield. This will deprive the state owned banks of much needed cheap financing to help prop up their balance sheets.

In addition to the Wenzhou reform, the Chinese government has also widened the trading ban for the yuan and raised the cap on foreign investment in China’s securities market. Although these reforms seem encouraging, both loosen the grip of China’s government on its economy which could potentially lead to sudden drastic moves.

Still despite minor reform, the state retains a tight rein on the economy. It is also reflating. State owned banks lent to 2 trillion yuan in the first two months of 2012. This is almost twice what was lent in the last quarter or 2011 and two thirds of the entire lending for 2008. Not only does the patronage system distort this lending, the continuing government restrictions on real estate developers have made the problem worse. It has to be remembered that the recipe for stagflation requires permitting excessive growth of the money supply with excessive regulation of markets. Both of which exist in China.

The vaunted Chinese policy makers are faced with a paradox. Reforms aimed at strengthening the economy could weaken it. Unlike western economies, China’s economy is still growing quickly. To revitalize their economy the Chinese are resorting to more bank loans which will simply increase inflation and bad loans without rekindling growth.

China's Slowing GDP Wolf by the Ears

William Gamble — Sun, 15 Apr 2012 15:19:15 GMT

China is slowing. Its GDP growth rate has fallen to 8.1%. Not to worry. Forecasters everywhere are more than confident that the Chinese can stimulate the economy if things start to get bad. This might be true if China was a normal economy, but its strengths can quickly turn into weaknesses. The reality is that they have the wolf by the ears and there might be no way out.

In its latest forecast the World Bank has cut its forecast for China from 8.4% to 8.2%. While this growth rate seems enviable, it is a 13 year low. The Bank also forecasts that the Chinese economy after a soft landing will bounce back by the third quarter of 2012. The recovery’s shape would be somewhere between a vigorous 'V' and a flat 'L'. The World Bank also forecast in June of 2008 that the United States would grow at 1.1%, Europe would grow at 1.9% and China would continue its growth of 9.4%. They also predicted in 2008 that a slowdown in the US would have little effect on China. They were wrong, very, very wrong.

The World Bank’s forecast has lots of support. A recent poll of 15 economists produced a median forecast of 8.3% while the Asian Development Bank (AD came in a little higher at 8.5%. Like the World Bank, the ADB’s forecast has been lowered from their report in December.

But it is not just the economic boffins who are forecasting slower Chinese growth. There is evidence from the real world as well. The most telling has to do with commodities. Over the past two years commodities seemed tied to equities. This changed recently. World stock indices rose more than 11% in the first quarter while the Reuters-Jefferies CRB commodity index stalled, up only 0.2 %. This was reflected in Morgan Stanley’s index of commodity producers whose shares lagged behind other sectors and gained only 4%. The sluggish growth was no doubt due to falling demand from China.

Real estate construction accounts for 13% of China’s economic growth, but the sector is also slowing. Sales transactions in Beijing, Shanghai and Shenzhen are about 30% below levels last December. Investment in property construction growth was up 12% of the previous year in December, but that was half the growth in November. Developers have up to two years’ worth of supply on their books and there are an estimated 10 million to 65 million unoccupied apartments in China.

Car sales are also slowing. In 2010 car sales exploded growing at 32%. They are still rising, but only at 4.5%. Dealers are now discounting to attract buyers. There is now concern that the annual forecast for 10% rise in sales will not materialize.

The slowdown in China is cause for concern far from its shores. One estimate puts Chinese contribution to global economic growth at two fifths, twice the contribution of the former locomotive, the United States. China has also replaced the US as the dominate trading partner of an ever increasing number of countries. It makes up over 20% of exports of Taiwan, Australia, Korea and Japan. The impact of China’s slowdown is not evenly spread. It contributes over 1% to the GDP of Russia, Korea, Indonesia and Brazil. Germany as well would be quick to feel a chill, since China contributes .8% to its GDP growth. In contrast the United States economy would hardly be affected. China takes only 7.6% of its exports and it contributes only 0.1% to its growth.

The main reason why the Chinese slowdown does not scare pundits more is that they expect China to repeat its past actions by loosening monetary policy and stimulating its economy as it did in 2009. Certainly it is trying. Bank lending in March rose to 1.01 trillion renminbi. This is high by even the more recent standards of the last two years and is two and a half times the amount of lending of last September and October. It is equal to a third of the entire amount of money lent in 2008 alone.

Not surprisingly inflation, which was considered tamed, has risen again by .2% from February and food prices are rising again despite record foreign purchases. It is not only inflation that is an issue. Most of the money lent by the state banking system goes to local governments. The most recent estimate is that about 10% will go bad by 2013.

So the Chinese have a problem. Their economy is slowing. Western economists feel that they have plenty of room for further stimulation, but that stimulation only results in more inflation and bad loans. As influential economist Tsinghua University Professor Yuan Gangming puts it “Monetary policy is already quite loose and the central bank won’t loosen more unless it wants to die”. Apparently they do.