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Beware: The "Made In China" Global Recession Is Coming, Morgan Stanley Warns
The next global recession may come with a label that reads "made in China" Morgan Stanley’s Head of EM Ruchir Sharma, says.
As regular readers are no doubt aware, decelerating economic growth in China has been a major drag on worldwide demand and is one of the main reasons why global trade is in the doldrums.
Flagging export growth (June’s "strong" 2.1% showing notwithstanding), a painful transition from an investment-led model to a consumption and services-driven economy, and an industrial production-sapping war on pollution have all conspired to bring the Chinese economic growth engine to a virtual halt, with some independent estimates putting output as low as 3.8% (which would constitute a blistering pace in the West but might as well be 0% if you’re China), far below the "official" headline figure which you can bet will remain at or above the Politburo-mandated 7%.
Here’s Bloomberg with more from Sharma on the "Made In China" recession:
Forget about all the shoes, toys and other exports. China may soon have another thing to offer the world: a recession.
That is the prediction from Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, who says a continuation of China’s slowdown in the next years may drag global economic growth below 2 percent, a threshold he views as equivalent to a world recession. It would be the first global slump over the past 50 years without the U.S. contracting.
"The next global recession will be made by China," Sharma, who manages more than $25 billion, said in an interview at Bloomberg’s headquarters in New York. "Over the next couple of years, China is likely to be the biggest source of vulnerability for the global economy."
While China’s growth is slowing, the country’s influence has increased as it became the world’s second-largest economy. China accounted for 38 percent of the global growth last year, up from 23 percent in 2010, according to Morgan Stanley. It’s the world’s largest importer of copper, aluminum and cotton, and the biggest trading partner for countries from Brazil to South Africa.
Yes it is, which explains why, as we noted on Monday evening, commodity producers which levered up in anticipation of a perpetual bid from China are now buried under hundreds of billions in debt amid slumping prices and a global deflationary supply glut.
And while the country’s shifting economic model undercuts global trade, the sharp decline in Chinese stocks poses a threat to the country’s presumed new engine for growth: the consumer.
China’s $6.8 trillion equity market roiled global investors over the last few weeks after a yearlong rally accompanied by record borrowing and surging valuations ended in a bear market.
"What happened in China last week was so significant in that for the first time, you’ve got this sign that something is out of control," Sharma said. "Confidence damage is going to last for a while."
Indeed it will, and as we’ve argued on several occasions of late (here for instance), the equity market sell-off has caused irreparable damage to retail investors' collective psyche, which could well have knock-on effects for consumer spending.
This means that just as the world begins to come to terms with the new Chinese reality wherein shifting priorities and more importantly, shifting demographics (the fabled "Lewis Turning Point"), transfer the burden of economic growth from the industrial sector to the consumer, the propensity for everyday Chinese citizens to spend may be constrained by the psychological effects of watching trillions in margin-fueled paper gains vanish into thin air.
So yes, Mr. Sharma, we agree with your assessment - we only hope you realize how right you are and position your clients accordingly.
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Not that I would agree with Morgan Stanley on pretty much anything, but I do think China is more vulnerable than most think.
Sure, but you also gotta see the profound corruption and gross mismanagement of the US banking sector, who willingly and knowingly faked valuations to lever and sell synthetic financial instruments.
I think they call that "growth", which is why just about every metric used to measure US and global economic health is an outright lie.
The US banking sector is appalling, no question, and China is even worse.
The Governor of the Bank of Canada (BOC), Stephen Poloz, was not kidding when he warned that the first quarter of 2015 would be "atrocious."
http://www.businessinsider.com/canada-on-brink-of-full-blown-recession-2...
The world's biggest economy now suddenly the world's biggest scapegoat. They just got the title; they make all the shit; who else is going to do it? If they go down doesn't every retailer like Walmart, Target, Sears etc...and Nike, UnderArmor, Lululemon and all the other shit brands or whatever is made there? Where will the knives on QVC come from?
LOL, so it's no longer the Fed's fault?
There is a global debt bubble collapsing.
A bubble blown by the central banks.
China is the target as scape goat.
Actually many low skill jobs have left China to Vietnam and other lower paying Countries.
China has also lost millions of factory jobs to robots, not only because of labor costs , but simply because a human cannot manufacture more complex products.
Many parts of Africa would be ideal , but many Africans do not aspire to working 60 hours a week so that they can buy a tv and pay cable costs.
So What. Canada in a full blown recession is still the best place in the world to live; with the worlds number one most stable banking system; you have no idea how lucky you are.
Beware, Yada, Yada--etc. Whatever.
The contention in the article is surely absurd.
If China is growing at (say) 3.8%, but global growth is 2%, then its is OTHER nations that are a drag on the world economy. To argue it is a growing nations fault for not growing enough is laughable. I suppose its my fault for not buying enough disposable crap. Its a silly argument.
As for ZHs contention that burning retail investors is all bad: is it? Irreparable damage to their psyche, or a cold shower of investment reality? Perhaps now Chinese investors will start to consider value & risk and not just momentum. Maybe moral hazard has been dealt an overdue blow in China (inadvertently, but still effective?).
How has the sharemarket affected consumption? Perhaps the ramp was at the expense of consumption. Perhaps investors will now divert a little money from financial assets to consumer goods or smaller production units. Investment in an unsustainable market ramp is a sure way to extinguish wealth, its a tax on the economy. Better that the ramp ends (bubble bursts), people learn some lessons (if that happens anymore), and surplus capital begins assessing risk and looking for more prudent and productive applications.
Wishful thinking I suppose, but the fact remains the interactions are more complex than reflected in "could well have knock-on effects for consumer spending".
If it's a Made in China Recession it won't last more than a couple of weeks so be careful.
At least it well take six to eight weeks to get here;)
And you will be hungry for growth an hour later.
The only thing likely to stop China's fall, is an end to the dollar peg.
Huge deflationary impact, and not pretty for anyone.
Latin America is also awful, almost everywhere.
Not exactly an oil painting here either.
Just had another supplier close their doors last Friday.
Going into HD or Lowes is like visiting a ghostland, no way they are even covering overhead,let alone
COGS.Customers outnumbered by staff 5:1
All I can think of is, TRUMP/ROMNEY 2016
Imagine the strength of the U.S. then.
https://youtu.be/BPGT7UPyzTI
All the other candidates are just wimpy lawyers, if you were to ask me.
...just...just go away...
All the other candidates are just wimpy.
There - fixed it for ya
D'oh ....somebody quickly revise those Greek recovery forecasts....
In a few years? He is highly optimistic.
A major portion of the problems of so many western economies is "Made in China." China and other slave wage economies have sucked up manufacturing from arouund the world. Not only 'Made in China" goods but so many other goods that claim to be made in various countries are made by these various slave wage nations. A few years ago i spoke with a person in the Italian shoe business that indicated so many of those 'Made in Italy" shoes aren't, and that the Italian shoe business was being decimated. Extrapolate.
By saving a few cents at retail entire populations have killed their own economies.
It's incredible. Last year I was out in the jungles of the Amazon way out from Manaus and we came across a village where the guide asked if we wanted some "hand-made crafts." Of course my friend and I jumped at it but were stunned when most of the items had stamped on the bottom, "Made in China."
Chinese goods have flooded the world and there's tons of moar stuff sitting on tankers offshore just waiting to be unloaded!
I knew this was a hare brained idea when they started doing it. If China does most of the production and the US does most of the consuming, that is obviously not a sustainable situation. Now these geniuses warn that there may be a problem. No worries - these same guys will have a solution that will make them look like the geniuses they think they are and we'll get the blame. The people are always the "whipping boy."
The bad thing abut a Chinese recession is that after a couple of days, you're craving for another one.
I ate at a German-Chinese restaraunt and 45 minutes later I was hungry for power
Warnings that start off with "Over the next couple of years..." are fucking useless. These guys can't tell what will happen with the markets in a couple of weeks. Warnings over the next couple of years are a waste of good electrons.
China bought the 2008 America debt.
So, Mr. Sharma the United States government doesn't control any of its own markets, right??? JPM and CITI do not suppress the PM markets in any way?? Mr. Sharma, you have no farther to look than the NYSE and the COMEX for rigged markets.
Ruchir sounds very knowledgeable. :roll:
A worthless prediction. "In the next couple of years . . ." Anything can happen.
Dont bank on it. China can start to kick ass in the South China Sea pretty soon. War Economy, BitChez.
Tyler,
I am an idiot, but I am smarter than you.
"...of watching trillions in margin-fueled paper gains vanish into thin air."
Unless these mooks had accounts with a rat-bastard whose name rhymes with Corzine, no money vanished. It was harvested by the pumpers from the muppets.
When Fox preaches ,
Hide your chicken
----
BRICS will rise
becuz
The fundamentals are right