China Markets and Economics Linkfest.

An interesting week in the financial markets. It appears we have avoided a major meltdown, although some historical analysis does suggest that major corrections often take the form of a large down day(s), followed by modest recovery or range trading and then further down.

Some notes on the China effect. Barry Rithohltz notes that the "blame China" crowd is ignoring one thing, the comparatively tiny size of China's equity markets:

Consider this factoid: The combined value of China's Shanghai and Shenzhen stock markets -- the total market capitalization -- was $400 billion at the end of 2005; Over the next 18 months, it nearly tripled, with especially strong gains over the last six months. After this week's 8.8% plunge, it is a mere $1.4 trillion dollars.

To put that into some context, the New York Stock Exchange (NYSE) has a global capitalization of ~$22 trillion. The Nasdaq is worth another $2 trillion dollars.

Bottom line? By my back of the envelope calculations, our correction of 3.5% wiped out an estimated trillion dollars in combined NYSE/Nasdaq 100 value -- two thirds of the entire capitalization of both of China's exchanged combined.

Brad Delong on Brad Sester on China's trading economy and us domestic policy:

Both the US and Europe... have done their part to support China’s development over the past few years. US imports from China have increased from $100 b in 2001 to $280b in 2006.... Eurozone imports from China have gone from 62b euros in 2002 to something like 130b euros, maybe a bit more, in 2006.... Both the US and Europe have supplied a lot of demand for Chinese goods over the past few years. The risk of a protectionist backlash is no doubt rising. But so far, the US hasn’t taken any policy actions that have really crimped the expansion of China’s exports – which is what I think worries DeLong.

Nor for that matter has the US government done much – if anything -- to help in the US whose living standards have been adversely affected by China’s export success. DeLong and Jeff Faux would both agree that tax cuts for the have-mores whose assets are worth even-more thanks to large financial inflows from China doesn’t count...

But China’s policy of buying dollars (and to a smaller degree euros) also means that China is sinking a growing share of its national wealth into a set of assets that are almost certain to depreciate over time.... The sums involved are not trivial. China is now running a current account surplus of around 10% of its GDP. That implies that about 20% of China’s annual savings... is being invested in assets that are likely to depreciate.... China’s government effectively now has a policy of both holding China’s current living standards down and sinking a fairly large share of China’s savings into assets that are sure to lose value.... The capital losses could destroy the PBoC’s formal capital: borrowing in RMB, even at an artificially low rate, to buy depreciating dollars isn’t a winning financial strategy....

I suspect China’s leaders will be somewhat less magnanimous. They will argue that the losses... [stem] from the failure of the US to adopt the policies needed to maintain the value of Chinese investment in the US....

I worry that at some point, China will conclude that investing so much of its savings in the non-tradable part of the US economy isn’t the best way of building Chinese wealth, and the flow of funds will stop. If that process is gradual, it will be for the best--but it if it is sudden, well ... a lot of US workers now employed in the non-tradables sector will need to shift into tradables production, pronto.

The tough issues of globalization, equity for those affected by same, tariff control need to be addressed. Sadly, the U.S. government is busy shouldering the White Man's Burden to the exclusion of all else that matters. Our standing in the international arena is approaching zero.

Bush isn't just planning on handing the unfinished business of Iraq off to his successors. Hes planning on handing everything off as unfinished busienss. He is a lame duck in every sense of the word.