China versus the Shutdown

By Mike Koetting February 4, 2019

What does China have to do with the shutdown?  Not much. But it helps put the shutdown in perspective.

The day before the partial government shutdown, the Dow Jones average stood at 22,445. The day before the shutdown unexpectedly ended, it closed at 24,576, a gain of about 9.5% in a little over a month. How could the Market gain that much when most of the American government was shut-down with who knows what damage to the American economy?

I certainly don’t know the whole answer, but to the extent the people who write on the financial news pages know the answer, there seems to be one over-riding issue:  How are tariff negotiations going with China? When there was good news about the discussions, the Market jumped; when bad rumors were in the ascendency, the Market tanked. (If you don’t believe me, simply Google “China negotiations and stock market”  For a tiny sample of up, see Fox Business news on January 18; for down, see a January 2 Reuters story.)

Look, I know this is hardly rigorous analysis and I know Market-watchers specialize in after the fact explanations that make the most insane jumps/falls look at least plausible. So I won’t fight this point to the death in a detailed way. But I won’t give up the general argument: at this point in American history, the Dow Jones cares more about China than the shutdown of the American government.

If you think about that, it makes sense. The Chinese population is more than 4 times that of the U.S. When China was dirt poor and technologically nowhere, raw population didn’t make that much difference. But that’s no longer the case. Although the standard of living in China is still lower than the U.S., it is growing and it has plenty of room to grow further. Twenty years ago, China’s economy was maybe 40% the size of the U.S.’s. Today it is probably at parity with the U.S. Even as its growth is slowing, China is still growing much faster than the U.S. Moreover, the Boston Consulting Group is projecting that Chinese consumption will grow at 9% annually through 2020.

As for technology, there is no argument that China now has a robust technology sector and the focused resources to ensure continued gains for some time. About being the first nation to land a lunar probe on the dark side of the moon, the head of the Chinese space program said “….this mission has helped our country make the leap from following to leading.” By itself, that would probably be an exaggeration. (Just ask Russia how far you can build a whole economy on a space program.) But in the context of a much more pervasive technology build-up across many sectors, even if a chunk of it is stolen, it is inescapable that China is now a worthy technological competitor.

In short, if you’re a corporation, you can’t see your future without China.

Note, the point I’m making here is not that China is any particular threat to the US. It may well be; it is certainly not a friendly country and has some very serious human rights problems. But that is not today’s post. Today’s post is focusing only on the implications of the fact that in the American stock market, it appears there was greater concern with the state of economic relations with China than the functionality (or lack of functionality) of the American government.

Implication 1:  Money has no country.

This is unlikely a newsflash to most of us, but we are not used to seeing it played out with such stark clarity. I am not sure this would have been possible in a previous world, before money was so rampantly unshackled from any social infrastructure. The argument has traditionally been that if a country taxes its most important business leaders too much, those leaders would leave and take their money with them. Maybe the converse is also true: if a country doesn’t tax its business leaders enough, they won’t have any allegiance. Or maybe it’s just that monied people have always been this greedy and it is only when economies become sufficiently fluid and governments stop controlling wealth accumulation that they are really empowered to act on it. So whether it’s cause or symptom, the willingness of investors to go wherever the money is biggest has never been greater.

There is a related issue. The rise of investor capitalism. Few corporations today have “owners” in the historic sense. We might think of Bill Gates as in some sense “owning” Microsoft. But, of course, he doesn’t. In fact, he owns less than 2 percent. The rest is owned by lots and lots of other people, most of whom have no real stake in the company, only its rate of return. In fact, many of those “owners” don’t even know they have some minute fraction of Microsoft “ownership” because they “own” it via index funds or through participation in pension programs, some of which use investment decisions determined simply by computer algorithms.  Perhaps, if asked, these people as individuals would say, “Yeah, we care about how the firms in which we invest make their money.” But there is no practical connection between any fleeting thought they might have about such things and how the market responds. The market, including the corporate CEOs whose compensation is determined by stock prices, don’t really care much beyond immediate earnings. And the earning opportunities, or threats, are apparently, very large in China.

Implication 2:  America is no longer the center of the universe.

Noah Smith, a Bloomberg Opinion columnist, points out this could change the structure of the world’s businesses. China may become

…the leading beneficiary of what economists call agglomeration effects. Agglomeration refers to the tendency of businesses to cluster together in the same region, because one company’s workers are another’s customers.… Agglomeration can bring big benefits to whatever region has the densest concentration of economic activity.

This may also change how we experience life as consumers. We’re used to being the market around which everything orbited. We expect a full slate of products designed specifically to American tastes. But increasingly, considerations will be given to how things play in China.

Karl Gerth, a history professor at U of C-San Diego who  has been studying Chinese consumerism, says:

For a long time, what’s popular in America often becomes popular in the rest of the globe. If, however, multinationals are getting most of their growth out of the Chinese market, then they’ll be orienting their R&D more towards Chinese consumers. That taste will be at the cutting edge, or dictate what tastes become like in other parts of the world.

Of course, things won’t change overnight. America still has a large and vibrant economy and will continue to strongly influence what is available to consumers. At least in the recent past, Chinese consumers have been focused on what seemed “American”. But there is evidence that fascination is fading and, as China becomes more assured of its own place, and as corporations become ever more concerned about how they are perceived in China, it is inevitable there will be changes.

Conclusion

The recent government shutdown was awful. It did all kinds of damage to all kinds of people, not least the damage to the idea that the elected government was capable of actually solving problems. But, while not a direct consequence of the shutdown, the circumstances illuminated with increasing clarity what has been going on for years: America can no longer assume it is at the center of the relevant universe. The relevant universe has expanded and we are no longer at the center, at least not alone at the center.

We will probably need a new national psyche. Too bad there are no therapists for countries.

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Addendum – Shout Out for Wikipedia

Wikipedia celebrated it’s 18^th birthday on January 15. I use it three or four times a week. It’s a really uplifting example of how borderless cooperation can make the world better. It also demonstrates how to use the Internet to actual bring people together as opposed to apart. If you think of it, you might send them a few bucks for their birthday.