Economic Outlook: China24 January, 2008, 2:10. Posted by Zarathustra
The theme of this article would be my speculations of how US recession affects Chinese economy.
Over the past few months, investors in Hong Kong have been discussing whether the slowdown of US economy would hurt China. The argument is that the Chinese economy is export-driven. The appreciation of the currency Renmenbi and the slowdown of US economy would hurt export, and thus the economy.
Some analysis was done by the economist at UBS. On 28th November 2007, Jonthan Anderson, Economist at UBS, released a report of 2008 macroeconomics outlook in China, suggesting that the Chinese economy is actually less export-driven as previously thought, thus US recession would not be hurting China much.
I have no idea if this argument is still relevant today as the economy and market conditions seem to have deteriorated much in recent weeks. Indeed, much worse that the first outbreak of subprime crisis in August 2007, so whether "de-coupling" effect can last is now questioned as Asian markets joined the global plunging. However, one new argument now becomes relevant: US economic slow-down would actually be helpful for China to prevent overheating.
Today, the Chinese government released their official figures of GDP and other economic indicators. The real GDP grew 11.4% year-on-year, and the inflation rate was 4.8%. The Chinese government has been fighting to prevent overheating the economy. The central banker has increased interest rate and the bank reserve ratio for numerous times last year, but still not be able to contain the inflation. Recently, the Chinese authority would like to implement price control. (Yes, price control, something we know it is bad. I have been saying to my friends, while the Chinese leaders said it is now a "Chinese-styled socialism", I would rather call this a "Chinese-styled capitalism"). The excessive liquidity was due to the large trade surplus in the recent years, and the Chinese government really finds no way out for the large surplus or large foreign reserve.
However, some now argue that the chance for a soft-landing comes, because of the slow-down of US economy and weakening of US dollar (or appreciation of the Chinese currency), the export to US would likely to be lowered, thus it would lower the trade surplus, help to solve the imbalance. In this way, China can find a way out to prevent overheating, and more importantly, to get rid of the price control (we know it is bad…)
My speculation is, yes, export must be hurt, and somehow it will helping cooling down the economy a bit. However, if the Chinese economy is not really export-driven, it is hard to assess whether the lowered export would be enough to cool down the economy. It is yet to be seen…