Hello Elmat, this is my "laugh a day" brief from Stratfor, the "everything-is-bad-for everyone-else-everywhere-else-except-in-the-homeland" analysis report :0)
Stratfor is quite funny without meaning to, and that is the best comedy one can get ... you know, Europe will spliter, Russia will atrophy, China will collapse, ... and oh, the homeland will do just great, heck, the economy is strong, people united, debt manageable, power plenty to spare, and everyone is dancing to our tune. Precious stuff, until the stuffing comes out.
EU: Chinese Crisis Would Pinch, But Not Hard
Jan 14, 2005
stratfor.biz
Summary
China's Ministry of Foreign Trade and Economic Cooperation reports that the European Union became China's largest trading partner in 2004, surpassing the United States and Japan, while China became the EU's largest non-European trading partner. The increase in trade is key for China, but trade between the two still represents just a tiny portion of European exports. Although a Chinese economic crunch would have minimal effect on Europe, the wider fallout could be problematic.
Analysis
China's Ministry of Foreign Trade and Economic Cooperation announced that the European Union had become the country's largest trading partner in 2004, while the EU reported that China has surpassed the United States in trade volume and become the Union's largest non-European trading partner.
Stratfor believes that an economic slowdown -- even a meltdown -- is in the cards for China. When that occurs, a crunch probably will hit Europe's top exports to China -- machinery and automobiles -- hard. Overall, European exports would be more or less unscathed; despite the increase in trade between the two, China is just a small fraction of the EU exports market. However, if China's economic problems spread beyond the country, they might drag the European Union down.
Eager to sustain economic growth and the flow of foreign investment, Beijing is sweeping its economic troubles under the carpet. This does not change the probability that China's state-owned enterprises (SOEs), which have for so long given the Chinese jobs and social stability, will undergo a widespread collapse, plunging millions of people into unemployment and destroying the country's industrial base.
Such a decline would hurt several European firms that have invested heavily in continued Chinese economic growth. European conglomerates such as BASF, Bayer and ThyssenKrupp have opened numerous manufacturing plants in China, and steelmakers such as Arcelor are capitalizing on huge Chinese demand. If the bottom drops out of the SOEs -- many of which are huge factories -- the demand for new factories and manufacturing services will fall drastically.
European automotive exports to China also are in danger if the latter experiences economic woes. Germany's Volkswagen accounted for around half the Chinese car market in 2002 (one recent traveler to Beijing says, "The streets are absolutely crawling with Volkswagens") although that share slipped to about a quarter of the market in 2004. DaimlerChrysler, BMW and Mercedes-Benz all have signed agreements to produce and sell cars in China.
But if China's SOEs fold or conduct substantial layoffs, Chinese buyers will lose both their jobs and financial support they receive from the state. Logic dictates, then, that demand for new cars will fall, since most Chinese pay up-front cash for vehicles instead of using loans (most state banks' resources already are committed to keeping the SOEs afloat). The rate of growth for car sales in China was 15 percent in 2004 -- a sharp decline from 75 percent in 2003. This decline could be a harbinger of China's financial troubles and could indicate the kind of reduction in automotive exports the European Union will face.
That machinery and automotives account for two-thirds of the EU's exports to China would seem to threaten Europe's economy in the event of a Chinese collapse. The actual trade figures, however, tell a different story. European exports were around 1.3 trillion euros (about $1.4 trillion in current prices) in 2003. Of that, just 41 billion euros ($53.7 billion) worth of goods went to China -- around 3 percent of the total. Even in Germany, China's largest trading partner in the Union, exports to China accounted for just 2.75 percent of the country's 661.6 billion euros' ($866.5 billion) worth of total exports in 2003. Compared to Germany's exports to France -- some 64 billion euros ($83.7 billion) in 2003 -- China represents a tiny portion of total trade volume.
Granted, 3 percent of trade volume is not an inconsequential figure, but a reduction in that figure certainly is not an insurmountable problem for the European Union. For example, German exports to China represent just 0.7 percent of Germany's gross domestic product. EU exports to China in 2003 represented just 0.4 percent of the total gross domestic product for the Union's members (which numbered 15 at the time). Certainly, a huge drop in exports to China will not bring on a European recession.
What can -- and will -- hurt the Europeans in the event of a Chinese meltdown is the fallout. No economy is insulated from all others, and even a decline in one small country can precipitate events that can bring down an entire region.
In 1997, what began with local investors fleeing from the wobbling Thai baht became a maelstrom that sucked down a series of Southeast Asian economies. During the next year, Indonesia's political system shattered: Japan -- the second-largest economy in the world -- was brought to its knees [EDIT by Jay: Yeup, to its knees, while holidaying in Hawaii and exporting capital everywhere else, and enjoying the good life back in Japan - where does Stratfor get its view from, or do they just dream it up?], South Korea stumbled, and even countries as distant from Asia as Brazil had massive financial crises [EDIT by Jay: some crisis, does anyone even remember?]. Before it was over, Russia suffered the world's largest (at the time) sovereign debt default -- largely to European creditors [EDIT by Jay: the implication being that had Thai Baht not collapsed, Russia would not have defaulted - another preciously funny contention].
If a Chinese economy collapse [EDIT by Jay: yeup, according to Stratfor's read, what passes for analysis these days, a collapse is a given, only one matter of magnitude, although China is in best shape in 300 years ;0) ] is relatively contained -- that is, if it does not precipitate an Asian domino effect -- Europe will feel minimal strain on its exports, which comprise one-fifth of the European economy. However, it seems more probable that China will spread its economic malaise throughout Asia, though it is difficult to tell how much the country will affect its neighbors. Where China will make Europe hurt is in the ripple effect its fall will create in Asia -- and outward.
[EDIT by Jay: oddly enough, not a word about the true impetus for the Asian Financial Crisis - US monetary policy that encouraged and enabled leveraging up of the SEAsian economies, which, together with pegged currencies, triggered the you-know-what hitting the proverbial fan, and as Soros had predicted, "this time it happens at the periphery; next time, the center" - what ever could Soros have meant? Bet with Stratfor or gamble with Soros, our choice]
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