Will Flight of Capital from China Help the USA?

The markets are worried that a slowdown in China will throw the U.S. into recession. Although China became the number one growth engine in the world after the Great Recession there is reason to believe that flight of capital from China will help instead of hurt the USA. Fortune writes about the situation.

Back in the late 1990s, during the last Asian financial crisis, many economists predicted that the turmoil would slow growth in the United States and Europe but, in fact, just the opposite happened: the late 1990s were some of the best years for growth in American history.

The contagion in emerging Asia didn’t spread to developed economies in the West for several reasons, but one major factor was the fact that the crisis was largely about the flight of capital from emerging markets, which had mismanaged their currencies, to the developed world. While many developing countries were hit hard by the Great Recession that started in the U.S. because of their reliance on exporting to the developed world, the Asian financial crisis led to the return of investment capital back to the developed world, which helped boost stock markets, lower interest rates, and power faster growth.

Exports only account for about 15% of U.S. GDP, while exports to the Pacific Rim account for just 2% of GDP. With figures like these, even a 10% decline in trade to the region would shave just 0.2% from growth in the U.S.

First of all only a tiny fraction of the US GDP comes from exports to China. And second Chinese business people will seek the best place to invest their money when China is in trouble. A month ago we wrote about Chinese investment in America. This may just be the leading edge of a flood of investment capital fleeing Chinese markets.

Who would have thought? Chinese companies are starting up cotton mills in America. Chinese investment in America makes sense to these businesses because for every dollar required to manufacture in the USA it costs 96 cents to manufacture in China. The New York Times reports on how Chinese textile mills are setting up shop in the USA.

Once the epitome of cheap mass manufacturing, textile producers from formerly low-cost nations are starting to set up shop in America. It is part of a blurring of once seemingly clear-cut boundaries between high- and low-cost manufacturing nations that few would have predicted a decade ago.

Textile production in China is becoming increasingly unprofitable after years of rising wages, higher energy bills and mounting logistical costs, as well as new government quotas on the import of cotton.

At the same time, manufacturing costs in the United States are becoming more competitive. In Lancaster County, where Indian Land is located, Keer has found residents desperate for work, even at depressed wages, as well as access to cheap and abundant land and energy and heavily subsidized cotton.

The end result of higher wages and other manufacturing costs in China is Chinese investment in America. How can US investors take advantage of this trend?

Add to this trend the Chinese who are buying condos on the Chicago lake front or even in London. There is a flight of capital from China which will probably get worse is the economic situation melts down. That capital flight will help cushion any effects of the China slowdown on the USA.

Worse in Asia

China’s slowdown and the decline of its stock market are having a more direct effect on economies in Asia. The Wall Street Journal writes about how China’s economic woes are spreading to neighboring nations.

A startling plunge in South Korean exports sharpened the picture on Tuesday of how China’s economic slowdown is rippling across Asia.

The 14.7% decline in August from a year earlier, driven in part by slack demand from South Korea’s largest trading partner, China, amounts to the first statistical evidence of regional trade’s decline since Beijing’s Aug. 11 currency devaluation. That move sparked wild gyrations in financial markets and jitters about sputtering Chinese growth despite Beijing’s efforts to bolster the economy. Asian shares fell again on Tuesday.

Foreign direct investment follows economic health and the flight of capital from China and other nations in Asia will probably help the USA.

Will Flight of Capital from China Help the USA? PPT

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