Moneybeat: China sneezes

MARY REICHARD, HOST: Coming up next on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business markets and the economy with financial analyst and advisor David Bahnsen. David is head of the wealth management firm, the Bahnsen Group, he is here now, David, good morning to you.

DAVID BAHNSEN: Well, good morning. Great to be with you.

EICHER: David, the regular listener has gotten relatively comfortable with a term you use to talk about the lackluster growth in the U.S. economy, saying we’ve taken to “Japanification,” and now just as soon as we’ve gotten used to that term, now you’ve started writing about “Chinafication.” Maybe you need to walk through what you mean by that!

BAHNSEN: In a sense, they're all kind of the same term. I'm glad to hear that listeners may be getting used to the term “Japanification”, because it's a word I sort of made up. And if I'm influencing people's vocabulary in that way, that's nice to hear.

The concept, of course, is borrowing off of what the lessons of the experience of Japan over the last 30 years has been. I primarily focus on the lessons in the United States post financial crisis: On that after 2008, we had a major asset bubble burst, went into a deflationary spiral, asset prices were dropping faster than we could reduce debt, and we chose to treat this problem with an avalanche of both fiscal and monetary stimulus. By fiscal, I mean we spent a ton of government money, borrowed money, of course. And then with monetary, I mean we used the Federal Reserve tools to try to reflate the economy and went to a 0% interest rate for many, many years.

And my belief is that Japan did it. The United States did it. And what they got out of it is this downward pressure on economic growth: Very, very subpar economic growth. And so Chinafication is simply taking the exact same concepts and suggesting that China may be on the verge of doing the same thing.

My most recent dividend Cafe is looking at the parts we do know, which is that China's in a real economic slowdown. And that at the heart of that slowdown is their property market, their real estate market, their construction industry grinding to a halt having achieved a bubble like status, and now coming back down to planet Earth. And now them being at a crossroads.

Are they going to use fiscal and monetary interventions to support that market to try to stave off the deflationary forces it's generating and, therefore, invite Japanification into China? I think that the goal would be for them to export their deflation around the world, which is most certainly what Japan did. And what, really, all countries are trying to do: Use their currency and use the global nature of the economy to take on some of their weaknesses and do their best to export those weaknesses around the globe. We all share a little bit in the declining growth. And there's a lot on the line here besides just what anecdotally happens to China.

EICHER: As I was listening to you talk, David, about similarities between Chinafication and Japanification, I wondered about the differences. Japan is an ally, Its prime minister with our president at Camp David.

China is, depending on who’s saying it, a rival at best, an enemy at worst.

Japan is more of a western-style open society, free elections. China is a totalitarian state.

I wonder how those differences figure in your analysis.

BAHNSEN: Well, we have to be a little bit honest about this Japan, we can call Western economy but Japan doesn't even pretend that their central bank and their government are separate functions, they work as one in the same. Now China despite the fact that they are a totalitarian and communist state, which refers very specifically to their appalling lack of civic freedom, religious freedom, and political freedom. China does allow the ownership of private property, they have an obscure hybrid of economic freedom with a lack of political and civic freedom. Now, I would argue, and I think you would do and I bet most of our listeners would, that that's not good enough that what they're doing in economic freedom is ultimately really not even all that free because they still have the ability to come take it back and they can imprison people and things of that nature. But my point being that economically, humans act in China off of economic incentives, humans act in Japan and America off of economic incentives.

Look at China over the past 40 years. Time has dramatically changed what their economic landscape looks like. It looks far more Western than certain Western economies sometimes do. And I would suggest that, sometimes, Japan's economy looks more Eastern. But you're very right. The communist nature of China's government complicates it.

What I would argue is more complicated is that China has the ability to accelerate their Japanification because they can intervene in markets more directly. When the United States came in and did Fannie Freddie, or when they took over General Motors, or when they did the TARP legislation that involves injecting equity in our financial firms, it was highly controversial. It was really difficult to do in our form of government. China has the ability right now to just simply prop up their property developers that are state owned, and do so at the expense of non-state owned property developers. And so there is almost an ability to get more juice out of their interventions. None of those things I would see as a positive.

EICHER: I’m reminded of the cliche, beloved in economic or geopolitical journalism, “when the U.S. sneezes, the rest of the world catches cold.” Will we do well to be aware of the economic sniffles in China? We’ve been down that road, so to speak.

BAHNSEN: I actually have news for you. The expression was originally, “When China sneezes, the world catches a cold”. And it's been used to apply to both countries so many times that I think that we forget where it all comes from, because both things are certainly true. All one has to do is just look up how much product is exported from China to other countries. And by the way, there are significant industries that different countries, including United States, rely on China to be a customer for a lot of the time as well.

Now, all that could be breaking down; a lot of that could be diminishing. I've talked in recent weeks about what I think will take years to play out with a marginal reshoring of a lot of America's manufacturing, particularly around things that are more supply chain critical. I think that's a much more complicated subject than people act like it is. Yet my point stands: No matter what anyone's view of China's role in the global economy, there is very much contagion impact that when they sneeze, the rest of the world catches a cold.

We've seen this loud and clear in recent years. When China decided to make a change in their currency policy in 2015, the rest of the world went into a total kind of shock around it. When China decides that they need to strengthen their currency, or when they decide they need to weaken their currency: That has an impact. And of course, the same exact thing is true of the dollar as well in the U.S. But I don't think anyone can look at the decisions a major economic powerhouse like the United States or China are making and believe it doesn't impact the rest of the globe.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. You can keep up with David at his personal website, Bahnsen.com. His weekly Dividend Cafe is at dividendcafe.com.

Thank you, David!

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