General | Feb 03 2006
China’s economy showed some signs of weakness towards the end of last year but as UBS points out, its domestic recovery is now back on track and almost all the indicators of domestic demand look positive.
The broker notes inflation remains moderate despite the strong growth, industry earnings are improving and profit margins are stable, all while the trade balance is improving.
This last factor is significant according to Morgan Stanley chief economist Stephen Roach, as he notes it reflects the government’s new emphasis on shifting its growth model to stimulating domestic demand.
While Roach suggests any shift from an export led growth cycle to one driven by domestic consumption is likely to take several years to complete, the end result will be a more stable economy overall.
There are implications from such a shift though, particularly for Australia as in Roach’s view the change in emphasis will see Chinese demand for commodities decline in coming years, most likely at the same time as the “Supercycle” theory is even more entrenched than is now the case.
He suggests such a fall in demand could be broadly based, with not only metal prices but oil and gas prices also coming under pressure as China’s investment cycle slows and it attempts to preserve resources more than is currently occurring.
The upside in Roach’s view though is as the economy’s balance improves the Chinese currency, the renminbi, is likely to be allowed to strengthen, which will both reduce China’s trade surplus and ease the current political tension over what the West perceives as a lack of progress on revaluing the currency.
Roach suggests this should also provide a boost for China’s Asian trading partners, as the stronger currency should allow then to lift their exports into China. As this shift occurs Roach expects foreign corporations will be granted greater access to the Chinese market, which will also go some way to lowering current trade tensions.
UBS agrees with the likelihood of a stronger renminbi, anticipating the currency will be allowed to rise by 4-5% annually, the broker forecasting a rate of less than 7.8/1 against the US dollar by the end of the year.
