A weak Chinese manufacturing report helped drive stocks lower recently. Although the problem of decreased industrial output may be in China much of the cause lies in Europe. As the Euro Zone increases it lending limit again, it has become apparent that the European debt crisis is far from over. The Euro zone put in place strict austerity measures during the run up to settling, for now, the Greek debt crisis. Although these measures are likely to reduce the costs of governing across the Euro Zone they are also likely to send the overall European economy back into recession for 2012. Europe is China’s biggest customer so it is no surprise that the cause of a weak Chinese manufacturing report is the lingering debt crisis in Europe.
The head of the US Federal Reserve, Mr. Bernanke, is an acknowledged expert on the causes of the Great Depression. According to current thinking, a bad recession was turned into a depression by ill-advised monetary policy in the early 1930’s. With this sense of things in mind, the FED is following the so called Bernanke Doctrine. These are steps prescribed as a preventative to deflation. Number one on the list is to print money. In addition the remedy includes the massive purchase of US treasuries which serves to drive interest rates down. And, this doctrine prescribes the massive purchase of foreign currency which serves to reduce the value of the US dollar. Simply put the FED is printing money to buy US debt and shipping dollar overseas. This policy may well have its intended effect of staving off deflation. However, it is not just the USA that is loaning money to banks at low interest rates, printing money, and buying foreign currencies. The net effect will be to inject an awful lot of capital into the global monetary supply. The sum of these efforts will not affect just direct investment in China. The weak Chinese manufacturing report is in many ways a symptom and not the primary disease.
What Is an Investor to Do?
If the Euro Zone is really heading into a recession this year investors will want to avoid Euro Zone stocks and at least look closely at fundamental analysis of individual stocks. If the US economic recovery, however slow, is for real, US stocks may well be a better choice. China has its own host of problems, political as well as economic. China may well decide to look inward, stimulate its economy and maintain employment with more infrastructure projects. Despite the recent weak Chinese manufacturing report China has large currency reserves. It may choose to spend those reserves to prop up its economy before Mr. Bernanke’s policy cuts the value of these reserves in half. After years of rapid growth China may be experiencing a “Microsoft” effect. When you grow to a certain size, rapid growth is very hard to maintain. Thus the weak Chinese manufacturing report may be a warning to investors to be careful in picking investments in China.