Trouble In Foreign Markets Could Give The U.S. It's Next Leg Up

I was to say the least intrigued by a headline I saw in the news this morning about tanks being used to keep protestors at bay in China, but the protestors were depositors and the tanks were keeping them away from banks. Despite China being the second largest economy in the world, you don’t really hear much about China’s economy in the news and in fact this headline was just an obscure hyperlink to an Indian news outlet that reported on it.

Once you start going down the rabbit hole and understanding what is really happening there, you start to see the scale of the issues and how that can affect us back at home and the real estate market. Clearly there are liquidity issues in the Chinese financial system, and they appear to be accelerating. Capital outflows from the Chinese markets in the first quarter of 2022 were the largest ever on record and by all indications the second quarter wont be any better or could be worse. There is a long list of reasons why this is happening which I will name a few here; continuing COVID lockdowns, Ukraine/Russia war, interest rates rising in ither economies, protective measurers to prevent outflows and run on banks, etc.

So how does this affect us here? Besides the fact that China contributes just under 20% of the world’s GDP, it is also a huge importer and exporter of goods. But I think there is a case to be made that a China slowdown could end up being a net positive for the US economy. Since we run a massive trade deficit with China, we are not reliant on Chinese demand, but rather Chinese supply for certain goods. As the FED raises rates and China’s economy slows, the Dollar/Yuan exchange rate will move considerably in our favor, making it cheaper for us to import what we are already buying. Also since China is a major buyer of commodities like energy, Iron Ore, Copper, etc.. as their economy slows, so will their demand for those commodities and we could see lower prices. Effectively, a China slowdown could help ease the inflation issues we are dealing with back at home.

The other arm of Chinese capital outflows is where that money is going instead. Not surprisingly, as China is seeing outflows, we are seeing inflows. In fact given the geopolitical and economic risks around the world, there are very few places for money to go besides the US.

China’s economy is difficult to understand because it’s not very transparent, so its tough to know exactly what’s going on, but it most certainly smells like a liquidity crisis. If it plays out to be so, the net effective could be positive for our economy, lowering inflation and input costs and attracting more investment capital to our shores that could provide a strong tailwind for the next leg up in our markets.