Why China and Corporations Are Alike

By RANA FOROOHAR Monday, Dec. 05, 2011

If you were putting the global economy on the psychiatrist's couch right now, the diagnosis would be schizophrenia. At a national level, it's all doom and gloom. The debt of practically every nation in Europe except Germany gets riskier by the day, and the predictable failure of the U.S. congressional supercommittee to make any real decisions on cutting America's deficit means that chances of an eventual credit downgrade just increased. U.S. T-bills continue to do relatively well only because Europe is a bigger disaster zone by comparison. Stock markets are suffering the fallout of partisan politics: jitters over the inability of U.S. and European leaders to get their houses in order resulted in a big dip in the Dow.

Then there's the good news. Until the recent sell-off, stocks had been slowly but steadily rising, with U.S. markets up about 10% since the beginning of October. And that's with Europe imploding and oil prices topping $100 a barrel. As strange as it seems, the disconnect makes sense; it reflects the growing disparity between the fortunes of companies and countries. Once inextricably intertwined, they are now almost wholly separate.

You can see the bifurcation in the markets themselves. Stocks may be spooked by political ineptitude, but given half a chance, they want to keep rising. Most rich-country bond markets, on the other hand, are relentlessly negative. That's because stock markets are driven by growth potential, which remains high, and bond markets are driven by investors' confidence in being repaid, which is waning. In the U.S. and Europe, unemployment remains at longtime highs, the debt picture is scary, and growth promises to be subpar at best. Political gridlock and volatility (witness yet another incumbent government ousted, this time in Spain) ensure that this will be the picture for the foreseeable future.

Bonds reflect the fortunes of countries. Stocks reflect the fortunes of companies. And multinational companies increasingly float above national politics, hedging their risk and their investments around the world. For them, there's been a fair bit of good news, including some underreported green shoots in the U.S. economy. Before the latest round of debt shenanigans spooked investors, stocks were rising in part because the data points in the U.S. were looking good. In the past couple of weeks, unemployment claims dropped, while bank loans, home sales, retail surveys and railcar loadings in the U.S. increased.

So did corporate earnings, as the world outside the West continues to do pretty well. There are three legs on the global economic stool: the U.S., Europe and the emerging markets, namely China. Most Western economists don't spend enough time thinking about that last one, but multinational companies do. More than 30% of the business done by big American companies is now conducted in "poor" countries like China, and among some of the larger consumer-goods firms, the number is as high as 60%. China has for the past two years been the world's top spot for new investment by America's largest firms, according to the McKinsey Global Institute. The U.S. is still No. 2, but India, Brazil and Russia round out the top five, which says a lot about where companies are placing their bets.

Even if China does nothing to grow its domestic economy--meaning if consumer spending stays at its current rate of 35% of GDP, about half what it is in the U.S.--Goldman Sachs estimates that the Chinese will buy goods and services equal to 10 times the Greek economy by 2020. If China manages to boost consumer spending by just a few percentage points, it will create enough growth to make two new Italys.

One of the reasons China's spending has stayed on track is that Beijing, unlike Washington and Brussels, has done a decent job of managing a threatening economic climate. China has a burgeoning property bubble and banking issues and is entering its version of an election cycle, as new leadership eager to appear tough on the global stage takes power next year. Politicians such as Mitt Romney and Chuck Schumer have certainly baited Beijing on currency and trade. But the Chinese haven't taken that bait; Premier Wen Jiabao said recently that China would "strengthen the yuan's trading flexibility in either direction" to create a more consumer-oriented economy. Translation: We're ignoring your short-term, politically motivated thinking and sticking with our five-year plan.

Long-term plans for growth are the sort of things that large American companies--and countries like China--have. Too bad they are still so lacking in the "developed" world.