China Impacts Your Allocation More Than Ever

What China does is far more important now to our personal finances than even during the '00s boom. If it fails to strongly stimulate its domestic demand, the U.S. and world could remain mired in recession for a decade or longer. If it rolls out a much stronger internal investment program, we'll raise our equity allocation much more quickly. That's why we're watching China's actions more closely than ever.

The crucial article on China is here. A crux of the long-term global problem now is the huge imbalance caused by China keeping the yuan artificially weak in order to export its way to prosperity. But that system can't work any longer because global demand is slumping and the U.S.'s deficits are becoming too huge to service. Now, China's efforts to export its way to prosperity will bring about continued over-capacity in the world, worsening deflation, sharpening U.S. debt-service problems, and intensifying trade protectionism.

So China needs to quickly develop its domestic economy.

What is so little talked about, but explained so well by the linked article above, is that the U.S. today should NOT be learning lessons from the U.S. in the 1930s; instead, China should.

China now, as the U.S. heading into the Great Depression, is heavily export-dependent, has large current account surplus, is highly vulnerable to the global demand implosion, is at risk of trying to export its way out of the current downturn, and is desperately in need of stimulating internal consumption by establishing a social safety net and other large fiscal investments that will give people the courage to spend.

The problem is even more acute when one realizes that China is far MORE export-dependent than ten years ago, and its consumers won't spend more as long as they have to pay cash up-front for hospital care, don't receive real unemployment insurance (or even back-wages) if they're fired, etc etc. And China's apparent unwillingness to face its domestic consumption shortfall puts the entire global economy at bigger risk of a decade-long depression. A Chinese New Deal would help elevate China's internal consumption to balance its export dependency, and establish a more stable society for the long-term health of its economy and the world. U.S. export markets would also grow more quickly, helping it to offset the economic impact of less Chinese investment in its U.S. securities.

Before allocating any capital to "risk-assets" anywhere in the world in the next few years, consider whether China is truly accelerating domestic investment and consumption.

The longer China takes to address the problem of its artificially-weakened currency, the more likely it is that investors will have to muddle through the next decade seeking secure cash yields in an environment of rising trade protectionism and a stagnant global economy.