International | Sep 10 2008
By Andrew Nelson
While China’s overheated economy is starting to show the strain of prolonged double digit GDP growth, Wells Fargo for one, expects the recent global slowdown will have less of an impact there than it will have on most other major economies.
To highlight the international nature of a slowing Chinese economy, Wells Fargo lays the majority of the blame not at the feet of any major domestic factor, but rather attributes it to a deterioration in demand from the US, Japan and Europe, who are spending less and less on Chinese exports.
Another culprit, says Wells Fargo, is the near doubling of oil prices over the last year, which has helped push up prices, not only for exports, but also for domestic food and energy. This has seen significant and rapid increases in the cost of both labour and land at a time when the nation is developing more sophisticated and subsequently tougher regulatory standards, which also lends itself to higher costs.
Factor in a 10% increase in the renminbi, making export goods even more expensive, and it’s no wonder the world is buying less from China, and therefore, China is simply able to make and sell less.
Ultimately, it’s all a question of scale. How big is big?
China has enjoyed double digit year-on-year (yoy) growth for the past five years, with 2007 boasting nearly 12% GDP growth. Industrial output increases, while correlated, have tracked 1%-2% higher than the GDP increase number, with last year seeing a 13.4% yoy increase.
Not a bad place to pull back from.
Wells Fargo predicts that real export growth in China will slow, but it will still remain above 10% for 2008, keeping China’s trade surplus well on the positive side over both the short and medium terms. GDP growth is also forecast to slow, but again to a healthy 9.8% this year and 9% next, with industrial output expected to decline to 10% and 9% growth over this year and next.
Scott Anderson, the bank’s senior economist, expects the economy to otherwise maintain a solid footing, with domestic demand expected to remain solid, providing an important floor. He sees private consumption growth remaining steady at a 9% plus the annualised growth rate, while business investment should cool even more slowly, down to 10% by the end of 2009.
If we take into account that the Chinese government booked its first fiscal surplus in 20 years last year, and tax revenues are up more than 30% in the first half of this year, it becomes clear that the government will have plenty of clout to stimulate growth where needed and curb inflation where necessary.
Anderson points out that in the past, China has used price controls to counter inflation, but this approach runs the risk of pushing up interest rates and therefore pushing up the currency.
As pointed out earlier, a rising renminbi is the linchpin for falling exports, therefore falling output, therefore rising costs and therefore inflation. And the wheel turns. Therefore, using price controls to bring down inflation is not an effective strategy in the long-run, concludes Anderson.
He feels that current global conditions, while crimping exports and production, will see inflation ease in the short-term. But any improvement is likely to be short-lived unless the Chinese government takes a more restrictive monetary policy to keep the renminbi under control.
