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Fed's Pause No Effect on China Economy
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billywows
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10-Aug-2006 06:15
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Interesting read for those into Chinese stocks ... Delinking China and the U.S.  By K.C. Swanson Special to TheStreet.com 8/9/2006 9:20 AM EDT BEIJING - The Fed's decision Tuesday to hold off hiking interest rates highlights the extent of the slowdown in U.S. economic growth. The evidence is plain to see, from disappointing second-quarter GDP growth of 2.5% to last Friday's limp jobs report. So how will the stateside deceleration affect China? After all, the U.S. is the biggest buyer of Chinese-made products, fueling its export boom with an insatiable appetite for cheap Chinese-made electronics, furniture and clothes. That export boom is a key part of the Chinese economy, accounting for nearly 31% of the country's GDP last year, up from about 20% five years ago. So a drop-off in U.S. demand for Chinese exports would seem to pose a big risk. But Chinese investors and economists sound surprisingly chipper. The reason? They have faith in China's central government, which has made it a top priority to develop a strong consumer economy. Beijing has lately been encouraging frugal Chinese to part with more of their renminbi. The government's role in mapping China's future can't be overestimated. As the sole repository of political power, and with foreign exchange reserves of $941 billion, it has tremendous power to set economic priorities -- and to sway consumer spending behavior. For example, when the central bank increased the bank lending rate in April this year, it chose to leave the deposit rate unchanged. One reason is that the government wants Chinese to spend their money rather than stash it into savings accounts. Top officials have also pledged to funnel more money into rural backwaters, aiming to narrow a worrying income gap between the countryside and affluent coastal cities. Such policies are having an effect. Sales of discretionary items like cars, furniture and cosmetics have been accelerating and becoming more cyclical in China, echoing patterns seen in more developed economies. "This likely reflects the upgrading of consumption patterns, especially among the rising urban middle class," says a note from JPMorgan, which estimates that group's size at 100 million. The strong government push to increase consumer spending should help offset the effects of a mild U.S. slowdown. "This is the right policy to try to stimulate domestic consumption and reduce reliance on exports," says Zuo Xiaolei, chief economist of Beijing-based Galaxy Securities, a leading Chinese brokerage. Referring to signs of slowing growth in the U.S., she adds, "I don't think they'll have an immediate effect on the Chinese economy." Wen Yufeng, deputy director of the research department for Boshi Fund Management, says consumption-oriented plays are one of the firm's favorite investment areas, reflecting its confidence in growing domestic demand. "Right now there's so much liquidity in China, and the economy is growing very strongly." In the second quarter, China's GDP checked in at a white-hot 11.3%, the fastest in more than a decade. Paradoxically, the economy has grown so fast that a modest drop-off in exports might have some positive side effects, Wen adds. With less renminbi flooding into the system, banks would rein in lending. That in turn would reduce the borrowing and speculative investment that has fueled rampant overcapacity in the industrial sector and property market. "Then the market would be less worried about future macro policy changes, and probably be less hawkish," says Wen. Currently, many market watchers are predicting that by the end of the year, the People's Bank of China will push through additional hikes in the reserve requirement ratio and/or interest rates in order to cool the economy. In the event of a more worrying slowdown in the U.S., Chinese authorities could easily employ a fiscal stimulus, pumping some of its vast reserves of cash into the domestic economy. But that's a worst-case scenario. Most investment houses are more optimistic about the global outlook. "Our house view for the U.S. economy is that it will slow, but it will be a soft landing," says Wang Qing, an economist at Bank of America. "We believe countries in Asia, including China, will be able to survive this slowdown, mainly because most of them still have room to stimulate domestic demand." Wang says the result could be what he calls a "delink" between U.S. and Asian economic growth. In other words, China could continue to see healthy growth, even if the U.S. outlook dims a little. G
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