Wednesday, June 9, 2010

China’s not the answer for the Eurozone

“Go long whatever Chinese consumers buy and go short Chinese capital spending (construction) plays. Consistently, go long tech/short material stocks.”
That is the first sentence of a BCA Research report’s executive summary on China equity strategy (link not available). Rather than a global equity strategy, I’d like to put this into an economic growth context via trade…and with Europe.

Go long Eurozone economies selling to China? Is China the panacea for Eurozone growth? Short answer is no, but we'll attend to that later. Even if the euro wasn't selling off against the majors, China's domestic demand is robust and export income is flowing into the Eurozone - but to where?

The chart below illustrates the dynamics of annual export growth to China for the top 6 countries of the Eurozone measured by GDP in 2009: Germany, France, Italy, Spain, Netherlands, and Belgium. Presumably, the bulk of China’s export demand would flow to these countries.

Since the Eurozone's annual export growth to China bottomed out in May 2009, many of the Eurozone economies (some not shown in chart) have registered, on average, double-digit monthly export growth to China: Belgium 49% Y/Y, Germany 25%, Spain 16%, Greece 19%, Ireland 22%, Netherlands 39%, and Portugal 49%. Only Finland saw its monthly average export income drop over the same period, -10% Y/Y.

(A note of clarification: the statistics in the chart are monthly Y/Y growth rates, while the statistics in the paragraph above represent the average monthly Y/Y growth rate spanning the period May 2009 to March 2010. All of this data can be downloaded from Eurostat, EU27 Trade since 1995 by CN8).

But 75% of the Eurozone’s exports to China flow from just three countries: Germany, 54%, France, 11%, and Italy 10% (average Jan 2009 – Feb 2010 and see table below). This makes sense, given that Germany, France, and Italy are the three largest countries in the Eurozone.

However, compared to the size of their economies, Belgium and Germany are the true beneficiaries of China’s external demand, not Spain, France, nor Italy. And this trade data is truncated before the record decline of the euro.

The table above relates each country’s share of total Eurozone exports to China to its share of Eurozone GDP. I’d say that Belgium is doing quite well compared to its larger neighbors, +2.5% spread on a 3.8% share base. But Germany's out of this world, 26.9% spread on a 26.8% share base. Spain, France, and Italy are faring poorly, as their spreads are wide and negative.

China appears to be the panacea for just a handful of countries, most notably Germany and Belgium. But alas, it’s no panacea for the Eurozone, not even for Germany. Unfortunately, the Eurozone's fragile developed colleagues, the US and UK, are.

The shares illustrated in the chart are calculated for year 2009.

Markets anxiously await China’s every move; but according to the April 2010 IMF World Economic Outlook, China ran the largest current account surplus across the IMF member countries - $284 bn in 2008 – the 20th largest as a share of GDP. That kind of saving is NOT going to get the global economy back on its feet in full very quickly. China is not the answer for Europe.

The Eurozone, in particular, is paying close attention to non-Eurozone (16 countries adopted the euro as their currency) growth alternatives. I leave you with an excerpt from a nice FT article on Europe’s true woes – fiscal austerity measures - featuring the research of Wynne Godley and Rob Parenteau:
Many years ago, he [Wynne Godley] also criticised the institutional arrangements of the European Monetary Union. Writing in The Observer in August 1997, he noted that members of the eurozone were not only giving up their currencies but also their fiscal freedom. Within the union, a government could no longer draw cheques on its own central bank but must borrow in the open market. “This may prove excessively expensive or even impossible,” he warned.

He went on to caution that without a common European budget, there was a danger that “the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression that it is powerless to lift”.
China is not the answer: not for Europe; not for the US; and not for the UK.

Rebecca Wilder


  1. welcome back to the netherworld, rebecca...

  2. rj, great to hear from you! Man, it's so satisfying to write again. Rebecca

  3. Good to see your take on the world again. So much has happened in the Eurozone since your last post. Go for it!  aj