Decoupling fans can’t be happy. Those few last souls cli-nging to the idea that Asia separated its fortunes from the US have to be sobered by China’s latest growth figures. Gross domestic product (GDP) grew 10.1% in the second quarter from a year earlier, down from 11.9% for all of 2007.
That’s still the kind of growth that economies such as the US can only dream about. Yet, global developments may prove dangerous for a nation that needs to create millions of jobs to keep people from protesting. The breakdown of China’s GDP data may be a harbinger of a difficult year ahead.
Observers are generally offering a balanced take on things. “The global slowdown has dented external demand, while faster yuan appreciation, higher wages and rising raw material costs have eroded China’s export competitiveness,” says Jing Ulrich, JPMorgan Chase and Co.’s chairwoman of China equities in Hong Kong.
Adds Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA: “Slowing economic growth, not rampant inflation, is emerging as the major concern for China’s political leaders.”
A more serious scenario em-erges as one connects the dots. Given overheating risks, more moderate growth is exactly what China wants. Only, the forces chipping away at GDP aren’t internal—such as higher interest rates and administrative steps—but external.
News that consumer prices rose 7.1% in June, down from 7.7% in May and a 12-year high of 8.7% in February, will be welcomed by officials in Beijing. The relief may be brief, though, when you consider what might unfold in the export markets that drive Chinese growth over the next 12 months.
Trade will provide a smaller contribution to growth, leaving China’s expansion to rely heavily on domestic consumption and fixed investment. The latter may cushion things a bit; the former explains why the Chinese government should be watching events in the US with heightening alarm.
US consumers remain a more potent force in Asia than the region’s central banks. That can be seen in how Asia has amassed trillions of dollars of foreign exchange reverses. The build-up keeps currencies from rising versus the US dollar, making exports more competitive. Demand from US households still means virtually everything in this region.
Trouble is, US consumers are in a pretty bad way. The worst housing recession in 25 years will have an exponentially negative effect on the biggest economy. The perilous state of finances at US government-sponsored enterprises Fannie Mae and Freddie Mac shows that the subprime loan crisis is spreading far and wide.
There’s relief that US officials are coming to the rescue. Many also are heartened that the US has avoided a statistical recession, or two consecutive quarters of contraction. Yet, the economic gloom in the US is hard to ignore.
An adjustment in perceptions seems necessary. In a largely service-based economy, anything in the vicinity of 1% growth is arguably recessionary. The idea is that service industry employees, many of whom aren’t unionized, may lose jobs faster today than manufacturing workers did years ago.
China also requires a different set of goals. For a 1.3 billion-person, labour-intensive, developing economy, growth near 7% would be a recession. If financial and housing woes drag down US consumption, Chinese officials will be hard-pressed to maintain acceptable growth. Inflation complicates things. While Chinese consumer prices are heading in the right direction, real interest rates are close to negative. With its annual inflation near the central bank’s benchmark lending rate, China will need to be highly creative to stabilize growth without fuelling price increases.
The concern for economists such as Stephen Green, head of China research with Standard Chartered Plc. in Shanghai, is that the central bank will be under increasing pressure to add liquidity to the economy, boosting credit growth. “We would likely see an explosion of loan growth and a rapid reflation of asset markets, including housing,” Green says.
Concerns about exports are almost certain to slow the yuan’s gains against the dollar. While good news for China’s exporters, that would leave the economy more vulnerable to the rising costs of energy and food shipped from overseas. Producer-price trends suggest that even if China’s economic risks are waning, inflation remains a threat.
Also, China can’t nimbly shift from relying on exports to domestic demand. The millionaires created in recent years as Chinese stocks rallied garnered considerable attention. Far less focus went to the hundreds of millions living on a few dollars a day. Chinese consumers have great potential, but they are far from ready to replace their US counterparts.
That goes for much of Asia. The region has done less than it should have over the last decade to boost domestic demand. China’s GDP trajectory isn’t a reason to panic. It is, however, a sign that the fastest growing major economy is encountering serious obstacles.
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