On one side of the Earth, it is night in New York. On the opposite side, sunshine in Shanghai. That is how it is in the current global market climate.
With unemployment rate dropping to new lows in the United States, China is creating more jobs for its people. Since the financial market meltdown in September, almost 1 million American has filed for unemployment, whereas in China, the government had created 50 million new jobs for the past 5 years and it is promising another 50 million new jobs in the next 5 years.
Although China's economy is powering ahead, it is not without problems. When one is poor, it worries about being rich. When one is rich, it worries about being poor again. China has gathered it's wealth ever since Premier DengXiaoPing ruling which has opened the China's door for open trade. Although China's stock market is still behind closed door, other doors have allowed great amount of foreign direct investments (FDI) into the country, pushing it s gross development products (GDP) to an all time high of 11% on average. People's livelihood is getting better. A recession on its part will be too much for its people to take, especially since they have tasted so much growth and relished the luxury of life. Now, their challenge - how to maintain this growth?
While the United States Fed is cutting interest rate, from 3.75 to the most recent 2.15 basis points, the Chinese government is continuously increasing its interest rate. Both approaches have a similar objective: To control the money the bank have. One important lesson from the recent slowdown in America, is that bank cannot be without money. Imagine if you put all your money in the bank, on the next day, the bank tells you they do not have your money as they have loaned all your money away and worse, now that they cannot collect it back. Last year's subprime mortgage bubble has set banks into a liquidity problems, drying their vaults. It jerked the bull in market, bringing in the Bear. The US Fed quickly reacted by pumping in billions of dollars and cutting interest rate. The side effect - a weakening dollar.
The approach in the Chinese government is just the opposite. While the economy is growing organically, it creates an euphoria among the people to take their money out from the bank and put it into the stock market. To maintain its supply of money in the banks, the Chinese government raised its interest rate, deterring borrowings.
As one is cutting interest rate, and the other is increasing it. Investors sees an opportunity in the interest rate widening gap. Supported by the undervalued yuan against the dollar, capital flows out of the US into China. For the last half quarter, China recorded USD 460 billion of capital inflow, 4 times larger than the total capital influx from 2002-2006. At first sight, the huge foreign investment in stocks and properties will further boost the economy, which is good. But on second thought, shall investors decided to lock in gains and withdraw their capital all at once, the market will crash.
In the past, we witnessed the global economic climate runs in tandem, with the US giant economy taking the lead. US economic problems is the world's problem. When it slows down, the whole world slows down. Then, the Fed will take measures to stimulate the economy, and the economy will boom again, leading the world economy into a bull market. This cycle repeats in unison.
Ironically, for the first time in this new millennium, we are witnessing 2 giant economies, with 2 cycle running in opposite in a paralleled time frame. Apparently to me, this is economic decoupling.
No comments:
Post a Comment