Why China Will Boom During the 2009 Great American Depression

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American dependence on oil and fiscal mismanagement will allow emerging markets to come into their own

By Chris Devonshire-Ellis

BEIJING, Sept. 30 – With the news yesterday that the U.S. Congress had voted against plans to inject US$700 billion into its beleaguered financial system, the chances of the United States entering into a depression have significantly increased. In fact, warning signs over the state of the U.S. economy and warnings over sub-prime mortgage debt have been circulating for the past 18 months. The phrase “Great American Depression” to give a title to the current state of affairs was first coined by Socgen analysts well over a year ago, while the debate goes way back to January; see this report by the Global Anticipation Bulletin.

With U.S. election due in just a matter of weeks, Congress has effectively voted not to allow the current administration access to US$700 billion of tax payers money to sort out the banking mess. That may well tip the United States into recession, even depression, but although that may well be tough for America and Western Europe, who also bought into the U.S. debt, it will have the longer term impact of allowing time for the United States to get their financial and regulatory house in order. That is to be welcomed. But what happens next?

As has been mentioned on many occasions, and well noted by the Chinese government, the United States has been following a reckless fiscal path over the past few years. That the pigeons are coming home to roost for the United States has also not gone unnoticed by many analysts, including Martin Hennecke of Tyche.

Now that it seems a “Great Depression” is nearly upon the United States, what will the impact be on China’s economy?

One only has to look at some basic data to determine some major differences in fiscal policy and especially energy. As oil has been at record highs, a U.S. slowdown should lead to a drop in price. However, if the United States has no money for the next few years to invest in any event, it would be emerging nations that maintain economic growth that would reap the benefits of this. It’s also important to look at the reliance of energy sources, and consumption comparisons between China and the United States in this regard. Here’s some startling facts:

76 percent of China’s energy consumption is from domestic coal
58 percent of the US energy requirements is from imported oil

China imports an average of 6.3 million barrels of oil per day
The U.S. imports an average of 21 million barrels of oil per day

Average monthly usage per kw/h per Chinese household: 100
Average monthly usage per kw/h per American household: 742

There are five times as many Chinese in a Chinese household than there are in America.

Consequently, with no exposure to U.S. debt, and sufficient reserves of domestic energy (albeit an old technology, coal is still highly important in China) plus including large natural gas reserves, China will be able to exploit a cheaper price for oil in more constructive ways to continue to develop its economy, while the United States languishes in negative growth.

Other Chinese policies concerning energy are also starting to bear fruit:

Energy saving technologies in China actually saw consumption drop by the following amounts in domestic companies with sales of excess of RMB50 million per annum, in 2007:
Steel: -6.49 percent
Construction material producers: -7.84 percent
Chemicals: -5.17 percent
Power companies: -2.57 percent

Although small increases were noted in energy consumption as follows:
Oil / petrochemicals: +1.27 percent
Non-ferrous metal producers: +1.58 percent

(source: Chapter 4.2 Energy – China’s Diminishing Energy Resources, “China Briefing Regional Guide to Beijing and Northeast China“)

In terms of China’s economy, it has been changing over the past two-three years and is increasingly a consumer driven economy rather than an export driven one. That said, Chinese exports are still an important part of its economic base. However, impact from a US slowdown is likely to be minimal. Indeed, as U.S. purchases slowed earlier in the year, China actually showed an increase in its exports as it sold more to other emerging markets both in Asia, South America, the Middle East and Africa.

While America struggles with a breakdown of its financial systems and massive debt, it continues to fight two wars globally, is largely dependent on oil, completely inefficient in its use of its energy resources, and has a new leader who will also have to be embedded in place in just a few weeks.

That is in stark contrast to China which is largely energy sufficient, (although supply chains needs improving a weaker oil price will help investment), it has a buoyant domestic economy, has engaged a moderate level of energy usage per head of population, is fighting no wars, and continues to have stable leadership.

China needs America as a buoyant and stable trading and world partner. But as the United States appears to be needing to sleep off an enormous hangover of financial mismanagement for the next few years, it’ll give the worlds emerging markets, with developing consumer economies, no exposure to U.S. debt, and considerably less dependence on oil, a massive window of opportunity to play catch up.

We would expect a China, and emerging markets elsewhere to boom during such circumstances, with growing economies well managed and fiscally secure, during a time when U.S. and European markets will continue to require less expensive products during their recessions.

For a European mainstream view of how the U.S. position will possibly alter global patterns, view John Gray’s London Guardian piece: “A Shattering Moment In America’s Fall From Power.”