World Sneezes, China's Just Fine
Economists say a global slowdown will largely spare a mainland economy
still based on domestic consumption and cu****oned by vast cash
reserves
by Frederik Balfour
http://www.businessweek.com/globalbiz/content/mar2008/gb20080318_747713.htm?chan=search
The Year of the Rat has certainly gotten off to a less than auspicious
start for China. The country got buffeted by the worst winter storms
in half a decade, causing food prices to soar and pu****ng inflation to
an alarming 8.7% in February (BusinessWeek, 3/11/08). The Shanghai
Composite Index is off 30% since the beginning of 2008, and property
prices have started falling in several major cities. China's heavy
economic involvement with the internationally unpopular regime in
Sudan (BusinessWeek, 2/13/08), and most recently the bloodshed in
Tibet (BusinessWeek, 3/17/08) threaten to spoil the country's Olympic
parade.
Now comes the U.S. bear market and housing collapse. If you heap this
looming U.S. recession onto the litany of China's other woes does it
spell a recipe for a total China meltdown? Don't bet on it. In fact,
analysts say that the question of decoupling-the notion that China is
contagion free from a global slowdown-is actually a misnomer, since
"historically, the Chinese economy has never been coupled," says
Jonathan Anderson, Asian chief economist at UBS.
So questions of semantics aside, what's really going on? The answer is
that while China is widely viewed as an ex****t powerhouse, selling
everything from garden gnomes to laptop computers overseas, most of
its economic growth is still fueled by domestic investment and
consumption, neither of which has shown much sign of slowdown so far.
Anderson reckons that China's gross domestic product growth will slow
to 10% this year, down from 11.4% in 2007, hardly the kind of slump to
cause serious concern for Beijing.
A More Open Economy
Still, the Chinese economy is far more open than it was during the
last U.S. recession of 2001. Back then, ex****ts accounted for just
8.4% of gross domestic product and today it's about 40%. The European
Union is China's biggest ex****t market, with 20%, just ahead of the
U.S. with 19%, while Japan and the rest of Asia take 25%, says Michael
Spencer, Asia chief economist at Deutsche Bank. He's estimating growth
will slow to 9.5% this year, but only half of that decline will be due
to a slower increase in the growth of China's trade surplus.
The reason the linkages from the trade sector to the rest of the
economy aren't greater stems from the fact that domestic content only
accounts for 25% of ex****ts. Another is that although the ex****t
sector accounts for 80 million jobs, the sector most likely to get
badly hurt is light manufacturing, which accounts for about 6.5% of
total employment in China, while the ex****t sector as a whole accounts
for just 5% of total investment, says Anderson.
Bear in mind too that China continues to amass huge amounts of foreign
exchange. In January alone reserves jumped $61.6 billion, bringing the
country's cash hoard to $1.589 trillion. That's quite a pile available
to the government should the need arise to prime the pump of an ailing
economy. But that is highly unlikely, says JPMorgan (JPM) China
economist Frank Gong. "Investment growth, loan growth, consumption
growth, and China growth are strong," he says.
The Chinese proclivity to sock away huge amounts of savings provides a
further cu****on to a downturn. That means the disturbingly high degree
of leverage that got U.S. hedge funds and households into the subprime
mess is a problem quite unknown in China where the minimum mortgage
down payment is 30%. "Residential mortgages are probably the best
asset in the banking sector," says Ryan Tsang, senior director of
banking research at Standard & Poors (MHP).
Balfour is Asia Correspondent for BusinessWeek based in Hong Kong .
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