China Would Welcome a U.S. Slowdown
It would weaken demand for Chinese exports and, in turn, help cool off China's overheated economy, which logged 11.4% GDP growth in 2007
In China, some people might actually be looking forward to a U.S. slowdown. That's because an American recession could do what Beijing has not been able to accomplish—namely, cool off China's overheated economy, which in 2007 grew at its fastest pace in 13 years. On Thursday, Chinese officials announced that the economy expanded 11.2% in the last quarter of 2007 and 11.4% for the year. "China tried to achieve a soft landing, but was not able to," says Qing Wang, an economist with Morgan Stanley (MS). "In 2008, China may be able to mainly because of a [possible] U.S. recession."
Since the second quarter of 2007, China's economy has been growing at a slower pace due to weaker demand for "made in China" exports by American consumers. The world's fourth-largest economy grew 11.9% in the second quarter, 11.5% in the third quarter, and 11.2% in the fourth quarter, in line with expectations. Tao Wang, a Beijing-based economist with Bank of America (BAC), expects China's economy to grow around 10% in 2008. "Throughout the year, we'll probably see export growth start to slow down"
Banks Are Flush With Liquidity
People's Bank of China, the country's central bank, has been tightening monetary policy to try to curb the overheated economy and soaring inflation, with little success. The consumer price index soared 4.8% in 2007, above the government's 3% target. The PBOC raised interest rates six times last year, bringing the benchmark one-year deposit rate up to 4.14%, and jacked up banks' reserve ratios to the highest level in two decades (BusinessWeek.com, 1/16/08). But those policies have not worked because China's consumer price increases mainly come from higher food prices. Earlier this month, the central government even reinstated price controls to try to stem the rise in food and energy prices.
Nor has the higher lending rates dissuaded Chinese banks from approving loans to real estate and infrastructure projects. China's banking system is flush with liquidity from the record $262 billion trade surplus. Investments into real estate projects, airports and other fixed assets rose 24.8% last year, up from 24.5% in 2006. Last November, authorities ordered banks to stop lending to new investment projects for the rest of the year to try to rein in fixed-asset investments, which economists say helped contribute to the slowdown in the fourth quarter.
While a U.S. downturn could buy policymakers some time, China's overheated economy remains a big headache. The causes of the overheating—a massive balance-of-payments surplus, excess liquidity sloshing around the banking system, and soaring inflation—have not been resolved. "The overheating of the real economy probably won't be such an issue in the short term but we expect that going into the second half of the year, overheating becomes an issue once again," says Paul Cavey, a Hong Kong-based economist with Macquarie Securities. "Food price inflation [will] begin to pick up, credit growth [will] begin to pick up, largely because domestically, in terms of the liquidity position, nothing has really changed."
Fewer Cool-Down Options
If and when China's economy starts to overheat again this year, financial mandarins in Beijing will find their policy options more limited than before. With the U.S. Federal Reserve cutting interest rates to try to stave off a recession, Chinese policymakers are concerned that so-called "hot money" in the form of foreign reserves will flow back to China in search of higher returns. "We will adopt measures to lessen the negative impacts from the slowdown in the U.S. economy," National Bureau of Statistics head Xie Fuzhan told journalists at a Jan. 24 press conference in Beijing to announce the 2007 economic indicators.
The Fed's cuts have made further interest rate hikes by the People's Bank of China less appealing, as it would run the risk of driving up the cost to mop up China's excess liquidity. Already, Beijing has quietly allowed the yuan to rise at a speedier pace since October. The yuan has climbed at an annual rate of 13% against the dollar, the fastest clip since China unpegged its currency from the dollar in July, 2005.
Most economists expect China's economy to grow at a more moderate pace due to a slowdown in export growth. But unlike other Asian countries, China's exports account for 9% of production-side GDP, according to estimates by UBS (UBS), keeping the economy's buoyant momentum relatively insulated from a global downturn. Robust domestic consumption and investment spending into real estate should keep the economy growing 10.5% in 2008, JP Morgan Securities (JPM) economist Frank Gong wrote in a note to clients. However, others such as Standard Chartered's Shanghai-based economist Stephen Green are less upbeat. He predicts China's economy to grow 9.5% this year as Chinese exporters unable to find buyers overseas bring their goods back home to sell, putting downward pressure on prices and eating into corporate earnings.
Tschang is a correspondent in BusinessWeek's Beijing bureau. |
