Tuesday, October 14, 2008

Don't let anyone tell you that China is not still "coupled" with the U.S.

Talk of global decoupling – especially emerging economies in Southeast Asia from the U.S. – has been the topic du jour for quite some time now. However, a Bloomberg report illustrates how strongly China is still “coupled” with its favorite trading partner, the United States.

China is still very much dependant on export growth, as evidenced by its currency appreciating only slightly during the inflation surges throughout most of 2008. Further, its mass accrual of reserves – most of it in $US – links China’s wealth explicitly to the Greenback and the state of the U.S. economy. As the global outlook suffers, China’s outlook suffers, too.

China continues to walk a very fine line between addressing the downside risk to its domestic economic growth and maintaining net-capital inflows that have defined China’s source of growth since the 1980’s.

From Bloomberg:
"China's foreign-exchange reserves rose to a world record $1.906 trillion, helping to strengthen the nation's finances as the credit crisis threatens to trigger a global economic slump.

Currency holdings rose 32.9 percent at the end of September from a year earlier, the People's Bank of China said on its Web site today. The increase of about $97 billion over the quarter was down from a $126.6 billion gain in the previous three months.

China has cut interest rates twice in the past month to stimulate growth as the worst financial crisis since the Great Depression dims the outlook for exports. The world's fourth- biggest economy can still expand 10 percent this year and 9 percent in 2009, central bank Deputy Governor Yi Gang said Oct. 11 in Washington.

``Close to $2 trillion in foreign reserves provides China with a strong foundation and more room to adjust policies to enable it to maintain relatively fast growth,'' said Isaac Meng, senior economist at BNP Paribas SA in Beijing.

The yuan fell to 6.8390 against the dollar as of 5:30 p.m. in Shanghai, from 6.8360 before the data was released.

Smaller increases in the reserves -- down from a record $153.9 billion gain in the first quarter -- suggest money is leaving the country as companies free up cash because of the credit crunch, said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai.

`Hot Money'

The increase for September alone was only $21.4 billion even after a record trade surplus added $29.3 billion and figures for foreign direct investment suggested another $6.6 billion entered the country.

China has stalled the yuan's gains against the dollar since mid-July. That step, along with rate cuts and crackdowns on illegal channels for investment, may have stemmed inflows of so- called hot money, or speculative capital, and triggered outflows.

Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong, said $10 billion to $20 billion of that money may be leaving each month.

That contrasts with the estimate of Michael Pettis, a finance professor at Peking University, that more than $200 billion flooded in during the first half.

The nation is at risk of ``massive outflows'' if expectations for yuan appreciation turn around, the central bank warned in a report released in June.
Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong, said $10 billion to $20 billion of that money may be leaving each month.

That contrasts with the estimate of Michael Pettis, a finance professor at Peking University, that more than $200 billion flooded in during the first half.

The nation is at risk of ``massive outflows'' if expectations for yuan appreciation turn around, the central bank warned in a report released in June."
Rebecca Wilder

4 comments:

  1. Rebecca,

    Saw the reference to your blog on Fundmastery. I read your bio and hope to read your blog regularly.

    I've heard two diametrically opposed views on where China is headed in terms of it being competition or threat. 1)That China has more "A" students than the US has students, which is obviously troubling for the US. 2) That due to 1 child per family rules for a generation, China will grow old long before it grows rich.

    What do you think?

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  2. Rebecca,

    I wouldn't believe it for a second if I had heard that China isn't coupled financially with the US.

    Where do US foreign reserves rate compared with other large nations?

    John -- interesting point. The "A student" thing doesn't bother me so much, many non-A students have gone on to do brilliant things here in America, but will China grow old before it grows rich...Guess that depends on how the US is doing???

    Great post,

    Tim

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  3. Hi John,

    Thank you for reading my blog! And thank you for commenting as well.

    I think that with a population that exceed 1 billion (I think 1.3 billion), it is easy to have more A students than the U.S. has students. It is interesting, though, to think about the education resources that the U.S. exports to China. In my PhD program, I would say roughly a quarter of our class was from Southeast Asia, mostly from China. The U.S. education system is very attractive to prospective Chinese students, and although they are often required to return back to China and work for a term, many want to stay and indeed find work where they can stay. So this is not such a poor deal for the U.S.: we educate the brainiest of the Chinese and they live here, be really productive, and contribute to economic growth. However, these days there is a lot of opportunity in China, and it is likely that an increasing number of Chinese students are returning to their home country after they get their degree from a U.S. institution to reap the rewards of such strong growth.

    I know a Chinese couple that stayed here in the U.S. after their education was complete (that was 10 years ago), but their extended family is still in Beijing. They tell me that the family in China has seen their incomes grow by several multiples just over the last year with all of the new opportunities. So I bet that the net benefits to the U.S. of educating China’s best is falling with the increased number of students who return home to enjoy the abundant opportunities and income gains in China: kind of the opposite of the brain drain.

    As for the 1 child rule – there is also another problem, and that is the male population outgrowing the female population because there is a stigma associated with having a daughter that does not apply to having a son (everybody wants a son). Thus, there is a higher rate newborn (or unborn, I suppose) female deaths than there are male. Think about that – one child per family with an ever-increasing mismatch between sexes. If I am not mistaken, both sexes are needed for procreation and population growth.

    In the end, China – both socioeconomically and politically – will likely (and definitely only eventually) reform to sustain its desired economic outcome.

    Hi Tim, "Guess that depends on how the US is doing???"

    People always talk about a hard landing in China, but what is that? Growth in the 8-9% range? That hardly constitutes a slowly moving economy - even in emerging market terms! And that prices in a U.S. recession.

    I think that better question is will China grow old before it really pumps up expenditures on its own domestic economy (not that they haven't already started, but the balance of trade is still so unbalanced). I think that the answer is yes - with a $1.9 trillion seriously misallocated portfolio, one would think that they will diversify (again, already started) and eventually spend it on themselves.

    Rebecca

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  4. Asia, like Europe, is too fragmented to go long without a major military blow-up. As US power slips, you will see the historical rivalries between Japan, Korea, China and Vietnam all come to the surface - probably around oil in the various disputed rocks/islands.

    As an aside; the US still has by far the largest reserves of gold in the world. China's reserves mostly consist of treasury notes which may or may not be worth something in the future.

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