Global stock markets continue to be incredibly volatile as issues in China are under the microscope. In an interview which appeared on Morningstar’s U.S. website, Ben Johnson, Morningstar’s director of economic analysis, shared his views.
China’s impact….
China is a big country. Its GDP puts it second in the world, only behind the U.S. by country. The European Union, if you count them all as one block, would be ahead of China. But it's a very big country that's got an influence on a lot of things. One thing to keep in mind, though, with China is that they aren't necessarily the be-all and end-all of the world economy either. They are a somewhat insular country, and so it's not going to necessarily have all the dramatic effects that people seem to be attributing to it.
Commodities…
With a lot of the industrial commodities--copper or coal or iron ore--China may absorb as much as 50% of some commodity categories. So, as they go, so go those commodities. So, that's got a very, very big impact on anybody that sells commodities into China. It also has knock-on effects, if you will, on Germany and the U.S. economy. To mine and produce and ship all of those commodities takes a lot of industrial equipment, which the U.S. and Germany happen to be very good at.
So, companies that produce those types of industrial goods will certainly have their share of problems.
Technology….
Also, China has absorbed a lot of cell phone materials over the last few years--some of it for export back out again. As Apple has grown so have a lot of the imports of raw semiconductors into China. Also, China was one of the fastest-growing users of cell phones and smartphones over the last several years. So, it's been a major source of growth for a lot of tech companies, and I think that is probably slowing up just a little bit or at least market shares are changing pretty drastically there. So certainly, China is having an impact there.
But a lot of other things aren't as important as you might guess.
The U.S. and China…
About 0.9% of the U.S. GDP is dependent on China. That's really a very small number. Canada and Mexico would be far bigger than that. So, it's not terribly important. And a lot of that's not terribly economically sensitive in the short run - it’s jetliners that are under 10-year contract deals. We may get different shipments every month, but it's not because of changes in the economy. It's because of changes in Boeing's production schedule. So, I'm not terribly worried about that.
Even in commodities, where we're probably most exposed in some of the gasoline- and oil-related stuff, those are necessities. And maybe growth won't be as fast as people thought, but it's not like they are going to use less energy than they used before. So, I'm not expecting a big impact on the U.S.
Interconnectedness and linkages…
Unfortunately, it's usually something you can't see. Or it's something that you don't think is that big of a deal, and it turns out to surprise everyone. But I think, certainly, my biggest worry that is there's some corporation that's very related to commodities that has a little bit too much debt and brings down a big U.S. bank or a big European bank or brings down some commodities fund or brings down some investment manager who has big lending amounts from a multinational bank. That's probably my biggest worry of what could go wrong here.
But I'm not as worried as maybe some are because China is very much an insular economy. It isn't like every big multinational's got a huge lending operation in China. China controls a lot of the lending market over there, and it's not like there's a lot of exposure to big banks. It probably won't transmit itself around the world. So, I'm a little bit less worried about that.
But there are other worries. I mentioned that China's not much of the U.S. economy, but it's more of some other economies. It's 3% of Germany's GDP and 6% of Australia's GDP. Those numbers can be much more affected. So, there are some things that we will see across the economy.
