Earlier in the week Stephen Roach put up this China slowdown 'alert'. Certainly China's growth engine is not unstopable, and there have been many who have pointed to the dangers of internal instability. But this time it is the driver himself who is applying the break. The really, really big problem (the scenario that every thinking person dreads) would be if this 'unstoppability' were to be tested by an unforeseen crisis. And certainly the rest of the world economy is vulnerable (in particular via the Asian economy) to any turbulence from China.
Personally, however, I think Roach is overdoing it a bit here. I think he over-emphasises the degree of central control over what happens, and he overstates the importance of conventional monetary shocks: even 'uncle Milton' has had to modify his views a bit on this one. So lets take this one day at a time.
The move to skim the froth off China’s exceptional growth vigor was initiated by the central bank in the form of an increase in reserve requirements announced in late August and made effective in late September.
The medicine is already working. The remaining vestiges of a centrally controlled system have certain virtues -- the word gets out quite effectively. In my discussions with senior officials in the Chinese banking sector, there is little doubt that lending growth has already slowed. According to their assessment, the response to the increase in reserve requirements has been almost immediate; lending is reported to be down in both September and October -- responding more to the announcement effect in late August than to the actual implementation of the action a month later. The resulting downshift has initially been concentrated in property markets but apparently is also spilling over into other sectors as well. This could be just the beginning of a shift to policy restraint in China...........
As bank lending slows, so should fixed investment spending. Our official forecast for the Chinese economy looks for 11% growth in fixed investment in 2004, half the excessive 22% rate of increase in 2003. The anecdotal reports from Chinese banking officials that I heard over the past few days seem to confirm this possibility, as the slowdown in real estate lending now spills over into other segments as well. Reflecting this investment-led downshift in domestic demand, we also look for a sharp slowing of Chinese import growth -- a 20% gain in 2004 following a 40% surge this year.
The import impact is of critical importance in understanding the pan-regional and broader global implications of the coming slowdown in the Chinese economy.............The bottom line is that any material slowing in Chinese import growth -- precisely what we expect over the next year -- will have important implications on Asia’s increasingly Chinese-dependent trading partners.
Source: Morgan Stanley GEF