International | Dec 20 2007
By Greg Peel
The analysts at GaveKal have been suggesting for a while now that they don’t believe the US economy will fall into recession. This forms the basis of their lack of concern over China, even though China will feel some impact from the Eurozone.
It has also been GaveKal’s view that Europe is susceptible to a more noticeable drop off in economic growth than the US. China has just surpassed the UK as the biggest exporter to Europe, with the value of exports having increased by 20% from just a year ago. But as China is now itself a major outsourcer of manufacturing, to the rest of emerging Asia, GaveKal is not overly concerned with the Europe factor either.
There remains a risk that China could actually shoot itself in the foot if the authorities move too quickly to tighten monetary policy, whether directly, or indirectly through such measures as raising the capital reserve requirement of banks and financial institutions. The recent “special deposits” initiative is a case in point. However, Gavekal doubts the Bank of China can do anything too damaging as the renminbi is still undervalued and real interest rates are negative. Any tightening measures may help to cool the Chinese economy, but not stall it.
Despite recent weakness in Chinese stock markets, GaveKal believes China is definitely decoupling from the Western world.
But today respected commentator Dennis Gartman had something interesting to say, and it stems from a letter he received from an old Aussie friend whose opinion Gartman holds in high regard. His letter went like this:
“I know anecdotal evidence is a favourite theme…
“I was up in Singapore last week, speaking to an executive coaching client on the phone from Beijing. He works in a relatively senior position in an active foreign bank. As an aside to our discussion, he mentioned that liquidity was virtually zero in China and that his bank was beginning to be unable to service loan requirements for even their top clients.
“His other interesting point was the premium cost (hundreds of basis points) of funds his bank was having to pay (even internally) was eating into his lending margin almost entirely. Obviously, there is a [defining] moment coming between them and their clients. I can’t help thinking that the combination of the credit environment and the Chinese reserve measures means there is a real crunch coming which might have a significant knock-on effect on the Chinese market environment.
“I can’t be quoted [by name] but you might well ask some other friends in Shanghai or Beijing for their experiences because I have never heard anything quite like it. I have been involved with these people for over a year now, and this is the first time it is encroaching on business and costing real money.”
In sharing this letter, Gartman adds that the three-day Central Economic Work Conference has just ended in Beijing, and that the overriding theme was that monetary policy controls should play a greater role in macro-economic efforts. This is evidence that China will be taking a much tougher stance than previously. There is growing concern from Beijing regarding China’s inflation problem – a problem which has tended to bring down ruling regimes in the past.
Says Gartman: “Things are tightening in China. Things will tighten more. What our friend has heard of is but the beginning. We are a very, very long way from the end.”
