China vs. the Fiscal Cliff


Two pieces of financial news highlighted the past day. Congress has been unable to reach a compromise on budget cuts and taxes, which could easily drive the U.S. economy into a first-half recession. And China's PMI reached a 19-month high, based on the closely watched HSBC index. The financial trouble in the United States will undermine China's future improvement. The gross domestic products (GDPs) of the world's two largest economies based on that measure are linked enough for that to be true.

The HSBC and Markit Economics PMI number for December was 51.5, with any number above 50 on the 100-point scale showing an expansion. Much of this comes as a result of China's own internal enterprise expansion and consumer activity. Exports remain at the core of the activity, though. That is the area that threatens the factory activity in the People's Republic.

The lack of resolution on the fiscal cliff likely will slow the American economy to a halt for months. That, by itself, will harm China's expansion. Married with recessions in most of Europe and Japan, the export outlook for China becomes grim. China would have to set in place a record level of stimulus investment and back support to aid its own consumption rates. Even China's mighty central government does not have the leverage to rescue its economy from a world in which almost all the other large nations by GDP are troubled, or very deeply troubled, as is the case in Japan.

China's GDP may have bounced up in the past few months of the year, which has cheered economists about its future. But expect a reversal of fortune in early 2013. The weight of the world is a drag that cannot be offset.

Douglas A. McIntyre

Filed under: 24/7 Wall St. Wire, China, International Markets Tagged: featured