Summary
The Chinese meltdown has more to do with China's overheated and speculative culture and dependence on exports with the United States, than with short-term developments and conflicting economic statistics on the state of the American economy.
Alan Greenspan's remarks and actions by the Chinese government triggered the fall. The Greenspan remarks are being blamed for the US sell off, but in reality it might be more likely that it is a recognition by the Chinese investors that China's overheated state of growth is driven by exports to American consumers. Thus a recession in the United States will put the kibosh on Chinese growth.
And like Japan before it, when the speculative bubble collapses, it takes down growth throughout the economy.
Unlike most countries, China's growth is dependent upon outside stimulus rather than self initiated growth. Once that cycle starts, it opens the door for speculative investments helped by cheap money and easy credit. Once it slows, this cycle reverses.
But the relationship between China and the United States is weak. It is a unidirectional bias with China dependent upon the United States, rather than the reverse.
Analysis
The Greenspan comments were made in Shanghai, not in New York. They reflect the idea that a slowing economy will put the brakes on US growth and investments. But to send the economy into recession the assumption has to be that there is inadequate demand. With so much of that demand being met by imports, then a slowing economy will have a greater effect on imports than on domestic production. America has become a service intensive economy. The result of a recession then will be felt in China, not in America. Thus the 9% decline in the overheated Chinese market.
There are many indicators that suggest that the American economy can weather the storm. We have become used to 3% plus growth, but 2% growth, if steady and predictable, may be just as good and possibly lead to a more balanced system. It will reduce the pressure on the Fed to keep raising rates.
Moreover, unlike Asian economies or even those in Europe, the Federal Reserve has room for lowering rates to prop up housing and durable good sales. There is plenty of room for maneuver.
At the present time America is living off the bounty of the world. When measured in terms of consumption, the American economy consumes 8% more than it produces. The Chinese economy consumes 4% less than it produces. Of the 8% over consumption, more than 2% can be attributed to the Chinese surplus with America. Thus any slowdown in consumer demand will have an impact on China's economy. Thus the Greenspan remarks were understood implicitly by traders on the Chinese market. I believe they were the trigger, not the Chinese government actions to reign in the speculative bubble before it ruins the gains made over the past twenty years in economic growth and progress there.
