International | Jan 25 2008
By Chris Shaw
With uncertainty the dominant feature in global markets at present finding a safe haven is the new game of choice and according to DBS Group China appears to be one such safe haven given the yuan appears likely to appreciate further against the US dollar.
Supporting this view is the fact further cuts in US interest rates are likely to support additional capital inflows into China, which would follow on from the more than US$400 billion increase in foreign reserves the country experienced in 2007.
One risk in the group’s view is such an inflow of capital sparks a further bout of asset and consumer price inflation, meaning those expecting the Chinese authorities to loosen macroeconomic policy from its currently restrictive level are likely to be disappointed.
Indeed, DBS expects further policy tightening designed to prevent further inflation via administrative measures such as additional price controls and from continued appreciation of the currency. This should in turn flow through into slower GDP growth, with the group forecasting an increase of 10% this year compared to the 11.4% achieved in 2007.
Much of this is likely to be due to a slowing of export growth as the US economy slows down, but with domestic demand proving to be well insulated from external shocks it is not expected that a US slowdown will have a significant impact on the domestic Chinese economy as well.
According to DBS any slowing in growth will in fact be welcomed as growth of 10% is far more sustainable in the longer-term and reduces the risk of a bursting of China’s bubble, something the world doesn’t need given the current issues in the US economy.
