China a strong buffer

  • Business
  • Thursday, 18 Oct 2007

The US subprime problem will not be catastrophic because central banks andmonetary policy have become more sophisticated and anticipatory. Sources of USeconomic growth have also broadened due to the change in forces shaping the globaleconomic structure. One of the most important forces is the rise of China 

CHINA is now the world's fourth largest economy and is projected to overtake Germany as the third largest soon. China contributed 17% to the world’s gross domestic product (GDP) growth in the last five years as opposed to 16% from the US. The emergence of China has a significant impact on the world economy. 

First, commodity prices have surged due to a large extent to China’s strong growth. Commodity-producing countries have benefited tremendously from the persistently high commodity prices. Second, the world economy had been experiencing low inflation rate despite the sustained strong global economic growth and high commodity prices in the past seven to eight years. 

This in turn enabled central banks to maintain a low interest rate environment, which facilitated economic expansion. China’s huge and cheap manufacturing capacity played an important role in creating this favourable condition.  

Third, China’s rapid economic growth has lifted her purchasing power tremendously. China is now the world’s third largest importer. This has made her an important destination for many countries’ exports, hence lifting the growth rates of these countries. China's rise has made the world’s economic structure more balanced. The US has dominated the world economy since World War Two, giving rise to the phrase “when the US economy sneezes, the world catches a cold”.  

With China becoming a major source of world economic growth, the world need not worry so much that the global economy will collapse should the subprime problem cause the US economy to slow down sharply.  

Although China is still unable to take the place of the US completely, the impact of a US slowdown will be significantly reduced. The last time the US economy fell into a recession in 2001, China’s economy expanded by 8.3% and the world economy expanded 2.5%.  

Some people may argue that exports are playing an increasingly important role in China’s economy, and a slowdown in the US economy will affect China’s growth significantly, hence limiting her ability to support the world economy.  

Well, from 2002 to 2006 when the Chinese economy expanded above 9%, with the exception of 2005 and 2006, net exports contributed less than 10% to China’s real GDP growth. Consumption and investment were the main growth contributors, accounting for 80% to 90% of overall GDP growth. 

In addition, US’ share in China’s exports has been rather constant in the last six years, hovering around 21%. Exports to the US account for about 7.7% of China’s GDP. Hence, a 10% fall in China’s exports to the US would shed only 0.77 percentage point off China’s GDP growth.  

In 2001, China’s exports to the US still managed to grow 4.2% although the rate of growth was substantially slower than the 24.2% increase in 2000. Therefore, a substantial slowdown in the US economic growth is not expected to have a major impact on China’s economic growth. 

While a number of Chinese banks have some exposure to the US subprime market, losses are expected to be small; hence, no material impact is expected on the economy. With China’s surging inflationary pressure, investors are also worried that the People’s Bank of China (PBC) will tighten monetary policy so aggressively that China’s economy will hard land.  

i Capital thinks chances of this happening are almost zero. First, the inflationary pressure came mainly from food, whereby supply was affected by bad weather conditions and a disease outbreak.  

In the first half of 2007, the core inflation rate, which excluded food and energy prices, stood at a mere 0.9%. Hence, the PBC is unlikely to raise interest rates aggressively in response to this temporary spike in inflationary pressure.  

Second, while China’s stock market is still in a frothy state, the Chinese government is more likely to introduce direct measures to deal with the condition rather than implement indirect measures, such as an aggressive interest rate hike.  

Third, 2007 and 2008 are very important years for China. The 17th National Congress of the Communist Party of China will be held next month. This is a very important meeting as new leaders will be elected to lead the country for the next five years. Hence, party leaders cannot afford to let the economy tank.  

China will host the Olympics in 2008, a highly important event to boost her international standing. It is unlikely the Chinese government will let her economy slow down so much that social stability will be undermined.  

Hence, taking all factors into consideration, as the subprime problem continues to unfold, i Capital believes that China will be able to play the stabiliser role she had played so well during the Great Asian Crisis. The world economy will still be able to grow reasonably well in the face of a sharp US economic slowdown.

For more news on China, a partner of Asia News Network, click here

Latest business news from AP-Wire 

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 1
Cxense type: free
User access status: 3

Next In Business News

Wall St drops as strong inflation data fuels rate hike bets
SC approves Yenher's plan to list on Main Board
Banks: Repayment aid continues to be made available
Malayan Cement buys YTL's cement biz for RM5.16b
Teladan Setia posts net profit of RM7.1mil in 1Q
Taiwan stock crash shows world dangers of too much leverage
Philippine cenbank holds rates at record low to support pandemic-hit economy
Kerjaya Prospek announces boardroom changes after takeover for E&O
Private equity firm to buy UDG Healthcare in US$3.7b deal
Zafrul: Keeping economy open during MCO 3.0 helps protect vulnerable, businesses

Stories You'll Enjoy