China's slowdown is good news for the U.S.

U.S. stocks have endured a lot of turmoil, but recent shocks have made apparent important facts about China and the shifting global economy long ignored by many analysts and investors. Those bode well for America and the bull market should soon resume.

Faulty accounting standards make it dicey to assess the true profitability of most publicly traded Chinese companies. Bond ratings, often a good first indicator of business health, are outright frauds in the Middle Kingdom — 97 percent of Chinese companies score AA or AAA, as compared to 1.4 percent for U.S. businesses.


Only 39 percent of Chinese shares are actively traded, with the balance held by government entities or company founders, whereas 94 percent of U.S. shares are in the active marketplace.

As of June 8, the Shanghai composite index was up 250 percent over the prior 12 months, then it plummeted 37 percent before stabilizing somewhat at the end of last week. However, that respite was accomplished after Beijing again flooded markets with liquidity.


Recently, Beijing opened the Shanghai and Hang Seng markets to selected foreign investors, but they have remained shy about jumping in and for good reason. Chinese company reports and stock market valuations are as fraudulent as China's GDP statistics.

The flood of cheap imports at Walmart and size of China's official U.S. dollar holdings testify to the heft of its economy, but official measures of GDP and growth are inflated and don't jive with indicators economists use to measure economies with dodgy statistics — for example, freight shipments, passenger travel, electricity use and property development.

Beijing reported 7 percent growth for the second quarter, but actual growth appears to have been about half that. If China's money losing zombie factories, propped up by government bank loans, were shuttered, the pace would be even lower.

China's economic strategy — yuan devaluation, government bank lending to favored enterprises and compelling western companies to transfer knowhow to gain market access — is running out of gas, much like the Soviet Union in the 1970s and Japan in the 1990s.

Now Beijing is taking aim at technology sectors — for example, cell phones, networking equipment and chip making — but indigenous Chinese companies face tough challenges making products Westerners want to buy.

Since Alexander Graham Bell, hungry entrepreneurs — like those who founded Apple, Google and Twitter — have been the real instigators of progress, not mega firms led by privileged CEOs like IBM and Hewlett Packard. And in China, big state owned enterprises and private businesses favored by Communist Party bosses specialize in winning political favor and protection, not sweating out tough-to-solve problems.

Moreover, western companies are quite adroit at keeping the important secrets to themselves. Consider how many joint ventures Beijing has forced with western automakers, yet indigenous Chinese firms still have not learned how to make an exportable vehicle.

Finally in the technology sector, Beijing's penchant for censorship, secrecy and control will surely place an additional burden on technology transfer and innovation.


The shift in China toward a more consumer driven and service economy may be bad news for companies and countries that pump oil and mine copper — like Exxon and Zambia — but it is good news for American technology companies, like those pioneering radical new ways to make goods like 3-D printing and developing pathbreaking products like electric cars.

As U.S. markets recover, winners will emerge among tech startups, and old line firms like Ford, which is betting big on making the automobile a nexus of high-tech consumer products, and Google, which caters to consumers worldwide by constantly delivering more value through constant innovation.

The U.S. economy won't be much hurt by China's slowdown because China has purchased much less in the United States than it sells here, but going forward for whatever growth China enjoys, it will have no choice but to do business with America's innovators.

The U.S. economic recovery and stock prices should follow those trends up.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1.