Global fears and fortunes truly linked

Even China’s strong internal growth can only partially compensate for the negative impact of the West’s economic and debt crises.

In the 12 months to September, exports grew by ‘only’ 17% (down from 25% in the year to August).

In the same period, imports grew by ‘just’ 21% (compared with 30% in the year to August).

We would expect weaker western economies to reduce China’s exports. The fact that imports also fell shows that China’s economy is also hurting.

(More details here.)

This short video is also instructive.

It continues the story of US actions against China for keeping the value of the Renminbi low, and how export growth from “the world’s manufacturing powerhouse” is a good indicator of health in the world economy: slowing, with the possibility of recession.

Most interesting, though is the last 60 seconds. Here the FT’s investment editor charts the implied volatility of US stocks (the VIX Index) in blue. And in red he shows the level of fear about China (as measured by the proxy of the market’s perception of the risk of a Chinese default — the spread on five-year credit default swaps).

What this shows is that, in the market’s perception, “fear about US equities falling is closely tied to risk in China.” (And both fears are rising, though not yet to 2008 levels.)

The US needs the Chinese economy to be strong, and vice-versa, just as there would be “very great” risks to the UK economy, if the euro were to break apart.

Our global fortunes are truly linked together, in a way that was not the case 40 years ago.

And in a third article, a European official has said, “We’re increasingly coming to the view that the eurozone crisis is too big a problem for Europe to solve on its own. If you want to sort it out properly you need American and Chinese money, which means the IMF.”

In fact the scope is even larger and would involve other emerging market countries, especially Brazil, “giving” money to the IMF, which “gives” it to European countries, which use it to bail out individual banks.

This truly is the start of a new, more closely integrated world — or rather the explicit recognition of how integrated the world has already become.

“The IMF declined to comment.”

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