China's 'New Reality'

My Australo-informants at Macquarie in Hong Kong have revised their predictions for 2009 and 2010 GNP growth in the Pacific Rim. They call their report The New Reality.

Their most dramatic forecast is that China growth next year will hit 10.3% vs an earlier growth figure from the same analysts of only 8.9%. Hong Kong and Taiwan growth was also adjusted upward but very modestly. The drop in GNP in Singapore for 2009 was reduced to minus 1.5% from minus 2.5%. But what really intrigued me is the China forecasts.

Macquarie expects that trade surpluses for China will shrink from an estimated 9.1% of gross national product last year to 3.8% in 2010. It evaded the issue of a forecast of the 2011 trade surplus.

China can no longer use domestic productivity gains to convert expensive commodities into cheap i-Pods (or whatever.) Exports are weak. The main state-sector enterprises, beneficiaries of the stimulus program, are inefficient and reduce productivity.

So the rise in Chinese output the analysts expect cannot be export driven. It will be the result of quantitative easing, banks lending more to inefficient SOES, and domestic demand stimulating local Chinese consumption. This reduces productivity rather than boosting it.

The international implications are fascinating. China's monetary easing will mean there is more money around. If the US parallel is anything to go by, more dollars means cheaper dollars. Will more renminbi mean cheaper RMB?

Macquarie is ducking the question citing cyclicality. China still is growing its market share in export markets (even though it is exporting less.) So there will be increased money flow from foreign countries for Chinese goods. Moreover, there will be greater inflows of investment, both direct and portfolio. So foreign currency inflows will continue to grow even though Chinese export dependence will sink.

The balance, Macquarie expects, will be struck so the RMP breaks to the upside. They expect the 6.83 to the dollar peg to break in 2010 as the Chinese currency forges ahead.

Comments

[Dave Wrixon:]

The peg will break and the Yuan is enormously undervalued so it will definitely break to the upside.

What I find difficult to stomach is the way Americans blame the Chinese for doing exactly what they have implored them to do for the last five years. The hypocrisy is unbelievable. Of course there is a good reason for this. If the Chinese are buying consumer goods, mainly their own, there is no way they can also support Obama's ever expanding borrowing requirements. You just cannot help some people!

Oct 21 10:57 AM

[James Lewis:]

Sorry, as long as the trade surplus is growing - China is benefiting.
So if they manage to get a trade surplus increase in 2010, after the obvious boom surplus year they will have in 2009 (when its finished). Then they are doing very well. My bet is its a little stupid to estimate numbers like this, because if Europe and USA slap tariffs on chinese goods. Then there will be a very large deficit recorded. (China's fiscal spending will require a great deal imported commodities in 2010). My bet the reason why they are not discussing 2011 is because they take the stance that the USA/Europe will slap tariffs on China in 2011).

It scares me but I think the Chinese are trying to devalue the appeal of the yuan by printing lots more. So if there was a float, the rmb would decrease because it has been devalued domestically.
If the economic war is really being fought on this front, China needs to watch itself domestically.

After all its has specific policies to limit wage growth under real inflation. If food and property costs go up, the poor will be squeezed even more so than they are now.

There is no way that the Chinese can print money like they have been and real estate/stock market not massively inflate. I am very scared teh Chiense believe that Japan fell into their 20 year slump because of the plaza accord. Not because they tried to inflate to become the largest economy in the world.

interesting..

Oct 21 01:07 PM

[Alphameister:]

Of course there will be inefficiencies in ANY government stimulus program, whether in the US or China. The difference is that China is much better positioned financially to absorb such inefficiencies while evolving to a more sustainable growth model. Sure, China faces longer-term problems as it moves ahead, but to my mind they are not nearly as daunting as those faced by the US. Meanwhile, Chinese equities offer much superior investment opportunities based on valuations relative to growth potential.

Oct 22 09:07 AM

[coreopsis:]

Relative 'values' of currencies against each other is neither a scientifically measurable quantity nor a simple concept. Instead, its primary significance is as input to the trading of currencies against each other.

There are several logical constructs for a quasi-economic valuation of which the most significant is probably 'purchasing power parity' using a basket of goods. Most current methods do not suggest the yuan is grossly undervalued. In fact the IMF model using this PPP methodology suggests the yuan is 78% UNDERVALUED.

The implications on global trade and the global economy of any significant revaluation upwards of the yuan vs USD are seldom IMO thought through completely.

A revalued yuan means a more powerful instrument for overseas acquisitions by China. Do you think US enterprise owners and shareholders will be more, or less, encouraged to sell to high bidders from China? Do you think it would be good for the US to continue to hollow out its industrial base? Do you think that further confrontations between the US and China (in the manner of Unocal) -- as the US will inevitably seek to block China acquisitions -- are desirable for global stability?

It seems to me that the proposition that a yuan revaluation solves all of American's industrial policy issues is merely a political gambit, backed by the unions and the xenophobic masses.

Be careful what you wish for, America, for the gods may take pity on you and give you what you hope for. .. And what you didn't expect.

Oct 22 10:52 AM

[coreopsis:]

Pardon the typo in preceding post (in caps, no less)...it should read that the IMF model shows 76% OVERVALUATION of the yuan against a multicurrency basket on a PPP basis.

Oct 22 10:54 AM

[Nettligent:]

No Job. No Money. No Honey. No Health Insurance. Save your money for Nightmares before Christmas ahead.

Oct 28 01:58 AM