Thursday, October 30, 2008

Chinese Economy in Focus -- China may cut rates again to ensure "gentle slowdown" doesn't turn ugly

On the ground, things don't seem so bad in China. As I report from Suzhou, China I see construction booming on both a residential level on in terms of infrastructure. However as Bloomberg LP paints in a article you can view here, things aren't so pretty on a macro level.

Actually they may depend on what you think "pretty" is. Economic growth will slow this year. 3rd Quarter growth in 2008 when released is expected to come in at around 9%, down from 2007's astounding 11.9%. Considering the state of the global economy many argue 9% is still quite healthy. However for a country seeking to fast track its economic development and solidify its position in the global economy the slowing growth rate is not welcome news.

The government is acting quick to stem the problem, having already reduced interest rates three times in the past two months. Will it be enough? Probably not...

For one, the reckless speculation from abroad and domestically on Chinese equities has fully exploded in investors faces this year (including my own). The CSI 300 is down a whopping 69% in 2008 so far, and has not seen the rallies other Asian markets like Hong Kong, Korea and Japan have seen when the west introduced their respective bailouts, lowered interest rates and set up new lending facilities.

Chinese Media, Xinhua reports export orders dropped in the 3rd quarter to their lowest level since 2005. Home sales have plunged 59% in Beijing and 39% in Shanghai so far in 2008.

All this looks bleak, but a casual observer may add that between 2005 and 2008, both Beijing and Shanghai have continued to grow rapidly. Few can deny the changes which have manifested in each city in the past 3 years, not to mention the rapid change which occurred between 2000-2005.

My observations are simple. China was indeed growing too fast for its own good, this financial crisis is simply bringing it back down to reality. China will continue to grow but due to the nature of its export oriented economy it must do so within the context of the world economy. All the while it does have the capacity to cushion its own slowdown with its domestic economy and macro policies which will help spur growth in the domestic market.

Check out this Bloomberg article to get a full picture.