CHINA: A UNIQUE ANIMAL IN THE WORLD ECONOMY By Richard McGregor
Monday, October 22, 2007
The Chinese economy has battled through, and brushed aside, a succession of local, regional and global crises in the past decade. None of them – the Asian financial crisis of 1997, the bursting of the internet bubble, the US recession and the home-grown Sars virus emergency – has been able to throw the Chinese economy off its stride.
With growth projected to surpass 11 per cent this year, China is looking well positioned to get through the sub-prime crisis now beginning to infect the US economy in particular. Even though China would suffer from any drop in exports as a result of a US slowdown, the fall-out should be manageable.
“China is well placed to deal with the possible impact of slower growth,” says Louis Kuijs, the World Bank's senior economist for China. “A moderate global slowdown would actually mitigate concerns of policymakers on overall growth, inflation and the trade surplus, while China's strong macroeconomic position provides tools to adjust the domestic policy stance if necessary.”
A host of factors underlines China's short-term confidence. Profit and loan growth remain high, ensuring that investment, which accounts for nearly half of Chinese growth, will stay strong. Exporters also remain super-competitive, despite cost increases and a 10 per cent currency appreciation since 2005 against the US dollar.
Inflation reached an 11-year high of 6.5 per cent in August, sparking grave concern among some policymakers who fear it will feed into the already bubbly stock and property markets. But, for the moment, rising prices are almost entirely due to food, driven by a shortage of pigs, and pork, China's staple meat, and higher global feed prices.
The big question about the Chinese economy is not whether it can continue to grow at a fast clip – it almost certainly can in the short to medium term. The issue remains whether it can grow differently, relying less on exports and investment in capital-intensive and energy-intensive industries, and more on domestic consumption. The so-called “rebalancing” of the Chinese economy, something that Beijing has said for nearly five years is essential, has more salience than ever in the light of a possible US slowdown. A rise in Chinese demand would help offset a drop in the US, and provide a potential fillip for the global economy. “Reducing the external imbalance may become an important contribution from China to world growth, if a sharper than expected US slowdown were to affect this adversely,” says Bert Hofman, the World Bank's lead economist for China.
The most obvious tool for reducing incentives for exporters, and also helping relieve inflationary pressures, is allowing a faster appreciation of the currency, the renminbi. But currency policy has not budged from the slow-and-steady course set two years ago, when the peg with the US dollar was broken.
China remains a unique animal in the world economy, a developing country by many benchmarks, but one with such size and heft that its impact is felt more like that of a superpower. China's current-account surplus this year is expected to be 12 per cent of gross domestic product, according to the World Bank and other estimates, unheard of for a country at its stage of development.
Smaller countries, such as the oil states and even Malaysia during its export-led development phase, have run similarly high current-account surpluses. But China's size, and potential future growth, give its imbalances an altogether different dimension.
China has taken a host of measures to rein in exports, which have been growing at nearly twice the rate of imports in recent months. Export tax rebates have been cut or abolished altogether for some categories of goods. Some exports, such as some steel products, are even being taxed. But the measures have had no discernible impact.
The rise in inflation has prompted a much more hawkish tone from the People's Bank of China, the central bank. Even after five interest rate rises this year and seven increases in the reserve ratio requirements – the amount of money the banks are required to leave on deposit with the PBoC – more such measures are expected in coming months.
Qing Wang, of Morgan Stanley, says the decision by China to press ahead with rates rises, at the same time that cuts are being made in the US, “suggests that they are confident that the impact of the US sub-prime crisis on China's real economy will be limited and China's capital account controls remain largely effective. Thus, the authorities' policy focus remains on addressing the risks of economic and asset price overheating.”
The stock market, which has quintupled in two years, remains a concern for the government. The market has little connection with the real economy, a fact underlined in numerous recent M&A deals involving dual listed companies in China and Hong Kong.
Fraser Howie, of CLSA, the brokerage, says valuations had always been based on the Hong Kong-listed price. “The A [domestic] share price is irrelevant when it comes to a real deal. No one treats it as any indication of a company's real value,” he says. Mr Howie says the stock market is a bubble, but one that is likely to be sustained into next year. Although China could not be characterised as a “bubble”, its leaders also believe the present model of growth is unsustainable. But it, too, is likely to remain unchanged into 2008.
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