Enzio von Pfeil
|Dec 20, 2007|
Some say China has become more dependent on exports to the US and Europe. Is China vulnerable to a slowdown in the US economy?
Without doubt, China is very dependent on her exports to America and to Europe
So in the short term, China is affected by slowdowns in America and Europe by way of exporting less to these places. Besides, if the US market crashes, then expect that to affect the psychology of ALL investors.
However, does this make China “vulnerable”? I am not so sure. The key is that private consumption accounts for two-thirds of China’s economy, and a large part of this is driven by fixed asset investment and urbanisation. Of course, China grows less quickly if her exports slow, but with the domestic part of demand increasing strongly, and especially ahead of the Olympics, I would not subscribe to the word “vulnerable” at least in the longer term.
Can China offer extra momentum to offset US economic weakness?
It is a myth that China, with one fifth of America’s per capita income, can offset the power of the American and indeed the European economies
A case could be made that strong Chinese growth, as well as a stronger RMB, make imports from the USA with her weakening currency more attractive, but I am not too gung-ho on this “the only thing that drives trade is the exchange rate”
Should Beijing spur consumption by letting the yuan rise faster? Pump up public spending to support demand as it did during Asian financial crisis?
If the yuan rises too fast, exporters will be hurt by costing more to overseas customers and by a worsening of The Economic Time in America and in Europe.
So they would do better by priming the fiscal pump, as in : urban renewal, build up for the Olympics. Their monetary policy is loose enough
Some economists point out that Chinese companies might try to make up for a shortfall in exports by selling their products locally. That, in turn, will reduce demand for Asian exports. Are you noticing this trend too?
Export markets differ strongly from domestic ones: the demand structures often are very different.
Also, why raising domestic sales reduces demand for exports to overseas countries beats me.
On a macro level, of course, companies that previously relied on exports can try to sell more domestically – but the economics of this are vastly differen
Are Asian economies fundamentally strong enough to withstand the effects of a protracted US slowdown?
The Economic Time™ is pretty good in places like Korea, India, Hong Kong and China. But we advise clients NOT to buy these markets until the US stock market has cracked.
Yes, all are fundamentally strong enough – in the longer term – to withstand a US slowdown. However, as we mentioned above, in the short term, any US slowdown will hit the psychology in the “real” exporting economy, as well as in the financial markets.
What about the more open economies like Hong Kong and Singapore?
Singapore’s problem is always that it’s the nice house in the bad neighbourhood. Witness the political undulations returning to Malaysia.
Clearly, we in Hong Kong are the water skier attached to the back of the Chinese speed boat, one that we think will continue racing along, thus dragging us with it.
In your view, is there room for domestic policy response in Asia to counter the effects of any slowdown?
Yes. You can loosen monetarily by pushing the forex rate down and thus selling more domestic currency into the market. Or on the fiscal side you can cut taxes or increase spending.