China May Achieve Soft Landing, Sustaining Steel, Car Demand
Jan. 10 (Bloomberg) -- China may pull off this year what many thought it couldn't: a gradual economic slowdown.
Rising interest rates and government-imposed lending curbs are cooling China's hot economy, experts say. At the same time, continued strong foreign investment, rising domestic demand and increasing exports will prevent a too-sharp descent.
The economy will probably expand 8 percent in 2005 after estimated growth of 9.3 percent last year, according to the median forecast of 12 economists surveyed by Bloomberg News. China's ability to slow the economy's growth rate without choking it ``has taken people by surprise,'' says Carlin Doyle, a foreign exchange specialist with State Street Global Markets in London. A year ago, ``there was great thought that this could only be a hard landing.''
That's particularly good news for Japanese steelmakers, American car manufacturers and Chilean copper producers -- all of whom would suffer from a sharp drop in Chinese demand.
``The world should breathe a collective sigh of relief,'' Stephen Roach, Morgan Stanley's chief global economist, says in an interview in New York. ``If China had headed into a hard landing, it would have cut the growth in its industrial production in half, led to a precipitous decline in commodity prices, especially oil, and would have resulted in a significant contraction in Chinese import growth.''
Sinking Markets
China's imports jumped 37 percent to $530 billion in the first 11 months of 2004, exceeding those of Japan. China -- the world's largest consumer of steel, copper and cement -- is the No. 1 export market for South Korea, Taiwan and Singapore and the fourth-biggest for the U.S.
The economists' confidence isn't evident in Chinese stock markets; that's because the markets may not reflect investors' real views about China's overall economic performance, says Donald Straszheim, president of Straszheim Global Advisors Inc. in Santa Monica, California.
The Shanghai composite index fell 15 percent in U.S. dollar terms in 2004 and the Shenzhen index slid 17 percent, making them the worst performers of 60 national benchmarks tracked by Bloomberg for the second year running.
The reason for the disconnect between expectations and the markets, Straszheim says, is that ``over 90 percent of their listings and market capitalization is in state-owned enterprises, which aren't good investments'' at a time when the government is trying to rein them in.
Expanding Economy
``Both of their domestic equity markets were down in 2004, the two worst markets in the world, and that occurred in the face of 9 percent economic growth -- the best in the world,'' Straszheim says. ``Every way is a better way to invest in China than their equity markets.''
China's $1.4 trillion economy expanded 9.5 percent in the first nine months of 2004 after annual growth reached a seven-year high of 9.3 percent in 2003. The National Development and Reform Commission, China's top planning agency, last month forecast a 9 percent expansion for this year.
There are signs the economy is cooling. Inflation slowed to a nine-month low in November, and industrial production rose at its slowest pace in 18 months. Investment in factories, buildings and other fixed assets rose 25 percent, less than half the 53 percent gain reported in the first two months of 2004.
``They have slowed their growth to a more sustainable level,'' says Michael Kiernan, managing director of Perth, Australia-based Consolidated Minerals Ltd., which supplies 5 percent of the world's manganese, used to make galvanized steel. The company will sell more than 400,000 tons of the metal to China this year, increasing shipments by at least a third.
Chilean Copper
Chile's state-owned Codelco, the world's biggest copper producer, says higher Chinese borrowing costs haven't cut demand for raw materials in its biggest market. Copper futures in London surged 37 percent last year to close at a 15-year high of $3,150 per metric ton on Dec. 31, fueled by surging Chinese demand for the metal used in electrical cables, power turbines and plumbing.
``The price of copper is responding to a very strong and solid demand, particularly from Asia and China,'' Juan Villarzu, executive president of Codelco, says. ``As long as the economy of China keeps growing, as it has done until now, and the economy of India too, it's likely we will have high prices.''
Chinese steel demand will probably rise 8 percent in 2005, the State Information Center predicts, led by auto production and preparations for the 2008 Beijing Olympics. General Motors Corp., the world's largest automaker, said last week its China sales rose 27 percent last year to a record 492,014 vehicles.
Surging Demand
JFE Holdings Inc., Japan's second-largest steel producer, raised its full-year profit forecast in November to 140 billion yen ($1.3 billion) from 120 billion yen after surging Chinese demand allowed the company to increase prices it charges automakers, shipbuilders and other customers. China uses about a third of the world's steel.
An expected gain in China's currency this year will probably benefit the economy overall even though it would make Chinese exports more expensive overseas, say economists such as Chen Xingdong, Beijing-based chief economist at BNP Paribas Peregrine Securities Ltd. A stronger yuan would increase companies' overseas profits in local-currency terms and reduce the cost of imported steel, oil and other goods.
Investors bet China will loosen the yuan's decade-old peg to the dollar. China's currency would rise to 7.897 against the dollar in a year if freely traded, a gain of 4.8 percent from the pegged rate of 8.277, forward contracts showed at 5 p.m. on Jan. 7 in Hong Kong. The contracts allow investors to bet on the value of a currency that isn't fully convertible.
Loosening the Peg
Chinese President Hu Jintao said on Nov. 20 that China will push to loosen the peg when the economy is strong enough to withstand disruptions caused by a revaluation. ABN Amro Holding NV, JPMorgan Chase & Co. and Bank of America Corp. all predict that China will loosen the yuan's decade-old peg to the dollar by mid-2005 or earlier. A stronger yuan won't derail China's economy, according to JPMorgan, which is forecasting an 8.2 percent expansion this year.
Straszheim doesn't even talk in terms of soft landings or hard landings. ``There isn't going to be any landing at all,'' he says. ``A variety of areas in China are going to be red-hot for a long time to come. Any investor in America who's not paying attention to China has got blinders on.''
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