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On a positive note for Japan, export growth in December surprised economists by growing at 12.1%, compared to the 7.6% forecast, for the first time since the collapse of Lehman in 2008. Breaking down the numbers, analysts were equally unsurprised to learn which market was responsible for the rapid growth. If I'm hitting my target audience, you've already guessed it... (hint: it starts with "Chin")

The half Joseph Stalin half Adam Smith economy continues to roar at 10.7% GDP expansion, in the final quarter of 2009, yet the majority of consumer markets have been slow to follow suit. Chinese stimulus can be thanked for the birth of domestic consumerism in China, as households have been given vouchers to buy specific goods, creating demand in centrally targeted industries. Simultaneously, all levels of government opened the faucet of liquidity, through low borrowing costs and lax loan requirements, which has accelerated the churning out of western style real estate for consumers to fill with all their new stuff. The price tag on China's stimulus so far scans just shy of $600 billion USD, representing 13% of GDP in 2008 and well above spending in the U.S. and Korea, closer to 5% of GDP for each.

As an ex-pat living in Korea, I can vouch for the tangible business and expansion that has been rumored to have begun in the East. The steady export market in China has buffered job losses and allowed entrepreneurs to take advantage of the record low interest rates which have spanned the globe. The result, through the eye of an American businessman, is a crane filled skyline in motion and downtown retail epicenters furious with life. It all seems eerily familiar to the consumerism evident in the U.S. circa 2004-2006, and is founded on an assumption perhaps less ridiculous than the "forever appreciating U.S. home price" fallacy, but equally as probable. The new assumption serving as the global economic engine, is that China's 10% growth is not only sustainable, but that it will occur for the foreseeable future.

Let's look at some of this "sustainable" growth more closely:

  • 2008 China GDP = $4,327 Billion (World Bank)
  • 2009 Unrevised China GDP = $4,910 Billion (China Daily)
  • 2009 Q4 China GDP Growth = 10.7% (Xinhuanet)
  • 2009 Outstanding Loan Growth = +$1,400 Billion = 28.5% GDP (2009 Est.) (WSJ)
  • 2009 Broad Money Supply Growth = 27.7% (WSJ)
  • 2009 GDP growth = 13.5% (unadjusted for inflation)

Recently markets have operated under an irrational paradigm where prices don't move until the reality of the situation is forced down our proverbial throat. Ironically it seems that the rumors, fears, and speculation about asset bubbles in China are enough for the communist leadership to forcefully hit the breaks on loose liquidity expansion. The ICBC will curb lending in 2010 by 25%, no doubt to moderate the pace of inflation and domestic growth, as it out-paces the anemic recoveries elsewhere across the globe.

This idea that China saw peak economic acceleration in the last quarter of 2009 hasn't sat well with market movers. While stricter borrowing standards may benefit all, helping to avoid a collapse akin to the U.S. real estate failure, the return to reality has traders scratching their heads for reasons to buy. Added stress from a reversal in the U.S. housing recovery and a weak demand forecast from multinational Caterpillar (CAT) have contributed to the past week's decline.

It's fair to say that the global recovery is fundamentally based on strong growth from China, while there is evidence that GDP growth in the cheap U.S. dollar-tied-Renminbi may be eroding sales from global competitors and misrepresenting global consumer demand. This week's negative outlook on Japan by Standard & Poors and manufacturing woes in Germany, beg that such fears are rooted in truth. Combining these symptoms with an autocratic body of leadership, resistant to allowing its currency to freely appreciate, has exposed the China led recovery to criticism.

It isn't hard to distinguish Asia's beating heart, albeit is any man's guess whether the continent's overall return to growth lives or dies. China is a formidable 1.3 billion strong populace, the world's third largest economy, and yet the IMF ranks the nation's per capita GDP 89th. As blind as justice, markets may now be signalling that the still developing nation cannot lead the globe from the stimulus injected foundations of recovery to global economic expansion. Whether they are right is up to each of us to decide.

Disclosure: No positions

Source: China's Growth: Blessing or Curse?