It is only a matter of time now before the US Economy takes a back seat to the Chinese economy.
The "Supply side" economic model promoted by Reagan and Bush actually works. Unfortunately it does not work for America.
The fact is a certain percentage of every dollar spent flows to the supplier, who ultimately becomes wealthy. The supplier is always the manufacturer of the products bought. That manufacturer as we all know is now the Chinese and not the US.
More and more Corporations simply profit from the markup on Chinese made products and as such they have become nothing more than a middle man or broker rather than the supplier even though they make claim to that title.
The Rise of Chinese Banks
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But the global recession puts some of that progress at risk. China's explosive double-digit economic growth in recent years, powered by its potent export machine, made it easy for banks to glitter. The rapid slowdown of China's economy represents the biggest problem. China's economy expanded at an explosive 11.4 percent rate last year. Experts estimate that pace will soon slip to 5 percent to 8 percent. While such a figure would represent nirvana for the United States now, the three- to six-percentage-point decline is similar in magnitude to what the U.S. is going through. Double-digit growth in China sent corporate profits soaring. Pretax profits totaled 11 percent of GDP last year, up from 4 percent in 2001.
"You have to be a pretty bad lending officer to find someone who's not credit-worthy in that scenario," Lardy says. "Now the economy has slowed, and profits will go negative very soon. Then we will learn more about the quality of loans."
As for the financial crisis that began in the West, it hasn't hurt China directly. But the resulting global recession has crimped demand for Chinese exports. And exports constitute a key component of China's economy. In addition, the government has protected banks by capping deposit rates and cutting bank taxes. That allows banks to cover up some deficiencies.
So Chinese banks are vulnerable. Nonperforming loans will surely increase. Still, a crisis is unlikely. The government has many weapons to fight the economy's deceleration—witness the recent announcement of a $585 billion fiscal stimulus plan. And the banks are much better equipped to handle loan losses now than they were years ago.
"There are potential risks, the magnitude of which it's hard to assess," Bottelier says. "But there are nowhere near the problems facing this country."
More from TheBigMoney.com
Chris Gay told the story of Hong Kong's laissez-faire myth. In September, Michael Lewis wrote that Lehman's failure was a wake up call to Asia. Chris Thompson examines China's ongoing love-hate censorship battle with Google.
Dan Weil is a freelance writer in West Palm Beach, Fla.
© 2009
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