The past few weeks has seen some major volatility within the stock markets. Some weeks have seen major pullbacks and others we have seen significant bounce-backs. The first ten days of April, the volatility of the markets hit on the downside. One thing which is interesting about this pullback is that it happened as the economy was pulling out of its pause caused by a very cold and harsh winter. For example, the first week in April we saw a stronger employment report and the second week first time claims for unemployment fell to levels not seen for many years.
When stocks drop the analysts are always searching for explanations, yet sometimes there seems to be no logic. One card which keeps coming up in explanations this month is the threat of slower growth in China. So we must ask, why is China so important to us other than it is a huge economy? Certainly at a growth rate of over 7.0%, this is not an economy in trouble. For one thing, the Chinese populace travels overseas to the United States in great numbers — almost two million per year. In 2012, the Chinese spent almost $9 billion in the United States.
Secondly, China helps keep our interest rates low in two ways. Their low cost of manufacturing lowers cost to our consumers. And the profits these manufacturers produce are eventually invested in US Treasuries. Basically, China is helping to finance our Federal budget deficit. More economic growth and lower rates? These are good enough reasons for us to hope that the growth in China continues. And good enough reasons to fret when it appears that the Chinese growth cycle is abating. So, if you are shopping for a home this week and enjoying the fact that rates on home loans are very low — don’t forget to thank the Chinese, as improbable as that may seem.
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