If you rely on News Feed in Facebook to find my posts, you're missing most of them. On average, only 16% of updates in Facebook make it into News Feeds. Let me suggest that you subscribe to me in Facebook, follow me on Twitter (@ccengct), or use an RSS reader.

Saturday, September 19, 2015

Calm down about China

You've read headlines, I'm sure, about the Chinese yuan (also known as the renminbi) and the Chinese stock market. These stories imply a catastrophe. Let's look more closely. Here's a graph of the exchange rate between the yuan and the U.S. dollar:

Data from http://www.oanda.com

As you can see on the far right, the yuan has indeed fallen in value recently — but not by much, from the perspective of twenty years. Now let's look at the stock market. This is the Shanghai Stock Exchange Composite Index:

Data from http://www.bloomberg.com

Anyone who put new money into the Chinese stock market in late 2015 or early 2016 got hurt, but someone who invested in 2013 or 2014 is still way ahead.

Personally I believe it's 80% likely there will be readjustments in China, just like there were readjustments in the U.S. after our own financial crisis in 2008-2009. It's only 10% likely there will be a 1929-like financial meltdown in China, and it's also 10% likely that all the losses of last month will have been reversed in two years. Think that's impossible? Read the history of Black Monday in 1987 which was largely forgotten within a few years.

Avoid schadenfreude when it comes to China. Yes, the U.S. has a trade deficit with China, but be mindful of two factors behind those numbers. One, the numbers usually exclude trade in services and in intellectual property — where the U.S. is much stronger than China. Two, Americans compete with Germans, Japanese, and everyone else for a slice of the Chinese import business which is huge. Competition for orders from China is cut-throat, and some American companies cannot compete effectively. But that's not China's problem, it's America's problem.

What does concern me, though, is that a retraction in China will reduce their demand for products from other Asian countries whose more fragile economies will then recess.