Will China Lead The Global Economic Recovery Or The Next Recession?

With Europe in flux over debt problems, the global economy is looking to China to lead a recovery. The problem is China is also facing challenges with a …

With Europe in flux over debt problems, the global economy is looking to China to lead a recovery. The problem is China is also facing challenges with a looming real estate bubble, and office vacancy rates in Beijing that are among the highest in the world. See the following article from The Street for more on this.

Just when we thought we were headed out of the recessionary woods, the international markets seem determined to drive equity investors back into the shadows.

Both the S&P 500 Index and Dow Jones Industrial Average finished the week on Friday with losses of approximately 1%, as the last trading day of the week began with China’s central bank announcing a somewhat unexpected tightening of credit standards.

The first week of February was no less jittery than the second, with the fears of Greece’s budget deficit throwing cold water on what had been a solid start to the corporate earnings season. Greece’s woes and the European Union’s attempts to put out the Olympic-sized debt fire has renewed fears that all of Europe may spark a double-dip recession.

A Bloomberg article noted that the euro weakened against 13 of its 16 most-traded counterparts, while the U.S. dollar rose. At the same time, European stock indexes slipped on Friday even as Germany’s biggest steelmaker, ThyssenKrupp, and Italy’s biggest oil company, Eni SpA, beat earnings expectations.

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What’s more, economic data from Europe also showed that the continent’s economic recovery has more or less stalled. Gross-domestic product in the 16-nation euro region increased 0.1% in the fourth quarter, one-third the rate economists had forecast in a Bloomberg survey.

European financial ministers are meeting in Brussels next week and it was clear on Friday that the markets are not fully confident, at least at this point, in the European response to Greece’s ongoing debt issues.

Of course, it wasn’t too long ago that the Dubai debt debacle spent a few days in the spotlight as the next big trigger for a renewed global crisis. But let’s face facts, China and Europe are a lot more important than Dubai as far as a global recovery, even if they can’t lay claim to the world’s tallest building.

The market jitters may seem a little much, given the overall corporate earnings reports, too, but China’s announcement on Friday that banks would be required to boost reserve levels was the second time in a month that China mandated that its banks increase deposits.

It is not overstating matters to say that the global economic recovery is pinned to the wings of China’s dragon. There seems a heightened degree of tension now between China’s efforts to aggressively slow the frothier edges of its economy — fears of domestic bubbles in China, particularly in real estate, are real — versus China’s need to manage its domestic front.

Hedge fund manager James Chanos has been saying for weeks already that China is in a real-estate bubble. Chanos, founder of New York-based Kynikos Associates, rates China as “Dubai times 100 or 1,000.”

Will Chanos be to China’s real estate bubble what John Paulson was to the U.S., calling his bubble shot and, unfortunately for the rest of us, being proven right? China could be the commercial real estate equivalent of the U.S. residential housing disaster.

There was $1.4 trillion in new loans in China last year, according to a recent BusinessWeek article, a big part of which went to build skyscrapers. Beijing’s office vacancy rate was more than 22% in the third quarter of last year, near the top of the global office vacancy list, and some local real estate executives are saying that vacancy rate is now closer to 50%. Even the 22% vacancy rate represented more office space than in Germany’s top five office markets.

At the same time that Europe and China provoke the markets into renewed recessionary fears, even with all the progress that has been made in the U.S, the employment situation in the U.S. is far from certain, and Congress is doing its part on its usual fits and starts with jobs legislation.

This article has been republished from The Street. You can also view this article at
The Street, an investment news and analysis site.


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