This Month in a Nutshell

(FOR JULY, 2015)

 

The stock market crashes.

The government panics.

The economy keeps slowing.

Debt keeps growing.

 

Stock market debacle adds to the pressure on China

China already had a full plate, even before the stock market debacle that began in June and continued through July. In addition to the plethora of issues any nation faces (in China’s case, environmental degradation, terrorism from a discontented minority, tensions in the South China Sea, a huge corruption problem, etc.), China began 2015 at the most critical point of its transition from an export and investment driven economy to one led by innovation and consumer demand. We say China is at a critical point because, not only does it have to adjust to a lower, “new normal” growth rate due in part to stagnate export markets, but the debt China has added over the past five years (debt to GDP increasing from 125% to more than 250%) is putting China’s long term growth at risk.

 

More reasons to worry

Meanwhile, the stock market debacle gave us at least three reasons to worry. First, China let a rapid increase in debt fuel the rise of the market, suggesting China is not as careful about leverage as it should be. Secondly, once the market turned, China was quick to turn its back on free market principles in order to support the market. While understandable in the short term, that’s not a recipe for long term success. Lastly, the fact that China let this happen at all suggests they still aren’t focused on what really counts—protecting the long term health of the economy via debt control and continued liberalization.

 

Will China fix the debt problem?

Will China continue to kick the can down the road? Certainly other countries have done so when it comes to curbing debt in their economy. All hope is not lost relative to China. It would be nice if the government gave us all more reason to be confident they will address the problem. The longer they wait, the more risk grows.

 

As if the above weren’t enough to worry about, Michael Jordan lost a court case and other stuff happened, too. Below is a quick summary of the stories in July’s newsletter.    

 

ECONOMY

 

Economy still weak; debt still growing

Economic indicators remain relatively weak, despite stimulus measures and continued expansion of credit in the economy.  Growth is still relatively strong compared to most other countries, but given recent trends, it is difficult to have confidence that growth will not continue to slow.

 

Stock Market: The Rise, Fall, and Ongoing Drama

China’s stock market more than doubled in a year, then fell by roughly one-third in two weeks, at which point the government intervened drastically. Since then the market has fluctuated. Much debate has ensued about the direction of the market and the impact on the economy.  

 

LAW & POLITICS

 

Michael Jordan Lawsuit to protect his name in China.

Basketball legend Michael Jordan sued a Chinese company for using his name and likeness. Lost first case and, recently, first appeal. Likely to appeal again. Meanwhile, legal troubles are hurting the Chinese company anyway.

 

Music Streaming Lawsuits Will be Good for IP Protection in China

Internet companies that stream music have begun to license content, as opposed to pirating. Now they are suing each other for allowing users to access licensed content for free. Hopefully such suits will lead to tighter IP enforcement in the music business (and overall).

 

Political Crackdown Update: Rights Lawyers Detained

The political clampdown that has intensified under President Xi Jinping went a step further with the rounding up of lawyers who defend those who claim their civil rights have been violated.

 

LIBERALIZATION

 

More regulation coming to internet finance

Internet finance is believed to have played a role in China’s recent stock market turmoil by channeling funds into margin buying. China is reacting by bringing new regulations to the sector. The fear is that the new rules will favor state-owned banks over new entrants.

 

OTHER

 

China’s slowdown impacting profits in the US

Given that foreign companies are so heavily invested in China it is no surprise that China’s slowing economy is impacting profits overseas.  But that doesn’t mean there will be a broad, negative impact on the US economy overall.

 

Auto market: Slowing down, but foreign companies confident in long-term

Slower growth in the auto market is impacting foreign auto firms, more at the low end than the high end. But major auto companies remain confident in and committed to China over the long term.

 

China way ahead of US in Mobile E-Commerce

A report by a research group shows how China is jumping to mobile e-commerce, at the expense of brick and mortar stores and traditional online shopping, a trend no retailer can ignore.