COFFEE & BISCUITS

Last week the Economist features an article putting forth the decoupling thesis, which says that the world will still grow with US in recession. 

Some facts the article uses to support its view:

1.  50% of China’s export is to emerging markets. 

2.  Emerging markets now export more to China, as a group, than to US.  The fact that China does not stop growing, therefore supporting the demand for commodities, allow the emerging markets that base their income on commodities to continue to experience booms (i.e. Russia, Brzil, some African countries)

3.  Only less than 15% of investment in China is linked to export.  The rest is linked to domestic.

4.  Multinational companies in US which derive parts of their profits from foreign business are reporting okay earning.  (i.e Coca Kola).

 I think the most powerful rebuttal against the decoupling argument is that much of China’s import from the emerging markets are intermediate goods that are used for assembling the final good shipped to US.  Therefore, the decrease in US demand just hasn’t seen its effect on China YET.  But it will show eventually.