Imbalances Persist

China’s modern German counterparts, chastened by the Weimar experience, are yet to be persuaded by cries to spend, spend, spend. As a result they currently only have to wrestle with the operational leverage of their manufacturing led economy. The Chinese, on the other hand, are double cocked. They have compounded the dangers from their operationally leveraged economy with a financially leveraged sovereign. And in doing so they may have jeopardised their country’s economic future. Creditor, or serial current account surplus nations, are always caught out by the pro-cyclicality embedded in their growth rates. By exporting surplus savings to the rest of the world and importing excess demand, the mercantilist leverages its GDP growth rate as the world expands. But when world trade stumbles they are always surprised by the severity of the resulting slump.

– Hugh Hendry, The Eclectica Fund, Manager Commentary, April 2012