This is an excellent article on the possibility of China and the rest of the exporters taking “the road less traveled by”, sacrificing a few years of strong economic performance, and fix the global imbalances that we see today. If this in fact happened, how would this change the investment landscape?
If it happened it would be fantastic in my view. The global rebalancing would begin in earnest and while most economies would experience a “muddle-through” scenario at first, as they undergo structural change, growth would eventually come back quicker than expected. For the US, a weaker Dollar would immediately begin helping exporters. The tense and uncertain backdrop created by today’s “currency wars” would vanish. It would begin to lift as companies know that they now have access to the largest consumer market in the world, in its infancy. Jobs would come back as manufacturing stages a come back. Transportation companies would also hugely benefit as commerce increases and more gadgets need to be shipped. Overall it would be a game changer in my view for the US economy and the seeds of a secular bull market would be sown. In China, enormous investment opportunities would sprout up everywhere, retail oriented companies would be a big one that comes to mind. Investment in China would increase. Inflation would become less of a concern as a stronger currency would lower the value of commodities like dollar-denominated oil and food. Purchasing power for the Chinese consumer would increase. Quite a pretty picture don’t you think? Think it could happen?
It certainly could if China felt that its domestic sector could support the economy without a hard landing. On the bright side, they are beginning to realize that the ball is in their court and that a stronger Yuan is what needs to happen for the current global recovery to turn into a sustainable one (all players win). Unfortunately, I don’t think China would agree to a Plaza Accord 2 at this point. Their economy is not yet equipped with a strong enough domestic sector to handle the change. All they would need to do is look at the Japanese and what happened to them when they agreed on the first one. The Japanese fate has them very scared is far as following a similar looking agreement. Another option is if our leaders have immense patience, they could babysit and wait it out while China hurries its economic restructuring. I don’t think this is a viable option either given that we are on the verge of double-dipping.
Although I don’t think that a deux et machina will result from the G-20 meeting in November, thinking about the other side is a good exercise to remain objective and be prepared for whatever may result.
Going a step further, let’s say that the bullish scenario occurs. The lovely scenario I painted in the second paragraph would probably appear in the minds of millions of investors. At that point, we may need to prepare for the policies of the Fed regarding QE coming home to roost.