Markets Insight
December 8, 2011 2:54 pm
Waves from slowing China to break our shores
By Henny Sender
On November 18, the great and good of the New York financial community flocked to the drawing room of the NY Palace Hotel to attend a lunch given by Chinese brokerage CICC in honour of the former vice-prime minister, Zeng Peiyan, and a senior delegation of Chinese leaders such as Lou Jiwei, chairman of China Investment Corp.
Facing the Chinese were senior executives from the buy-out world including Henry Kravis of KKR and Blackstone’s Jonathan Gray while the hedge fund contingent included Maverick’s Lee Ainslie, Eric Mindich of Eton Park, John Paulson, and Dinakar Singh of TPG-Axon. Wall Street was represented by Ken Wilson, the former Treasury official who is now at BlackRock and Lazard’s Gary Parr. There were a few chief executives as well, such as Klaus Kleinfeld of Alcoa.
The Chinese message was stark according to multiple guests: if your Congress passes a bill labelling us as currency manipulators, we will crush you. And because we find your government rather difficult to deal with, please convey that message on our behalf.
As economic growth slows both in Europe and Asia, the search for an edge becomes ever more critical and one of the more obvious ways to grow is to export, which depends at least partly on a relatively cheap currency.
The Chinese take great exception to the suggestion that they are the only ones trying to keep their currency cheap when, in their eyes, most of the world is playing that game. Many Chinese believe that any “quantitative easing” from the Federal Reserve is merely an indirect way of putting downward pressure on the dollar. They believe the euro was designed as a way to keep German industry competitive because if there was no euro, the D-Mark would have appreciated and Greeks and Italians (and Chinese) would no longer have been able to afford to drive sleek Mercedes and BMW cars.
The Chinese sense of resentment is also fuelled by a growing sense of confidence in the government’s own macro-management skills. The rest of the world frets that China may face a hard landing as its manufacturing index drops into negative territory. China’s export machine has been slowing, as labour costs rise, forcing many makers of cheap goods to shut down. The residential property market is plummeting.
That sense of concern is not evident in Beijing. China has seen the emerging markets of Asia seize up in the late nineties, with little impact on its own well-being. Japan has been losing ground for two decades. The global financial crisis of 2008 suggested that the US model was deeply flawed, its growth dependent on debt that came largely from Beijing itself. Now, with Europe in recession, many Chinese feel that their system has proved far superior to those of any of its competitors.
In the past, slower growth in China would have been a problem. In the last ten years, China needed growth of 8 per cent to generate jobs for about 115m people joining its labour force. But the demographic change as its population ages as a result of the one child policy means that in the coming decade less than 20m people will join the labour force. That means a slower rate of growth will not be calamitous for China.
China is beginning to reverse its tight monetary policy by cutting the reserves banks have to post with the central bank for the first time in three years. Now, because of the combination of those demographics and a slowing in Europe, China’s biggest export market, China needs to continue to shift to a more domestic demand led economy.
In recent weeks, data show a bipolar world in which the strongest bloc is the US, rather than emerging markets or (obviously) Europe. JPMorgan, for example, cut its forecast for Chinese growth and expects GDP to expand 7.4 per cent on an annualised basis this quarter and by 7.2 per cent next quarter. It forecasts emerging markets to grow this quarter and next by a mere 4 per cent, the lowest in the past decade outside the Great Recession, according to its economists.
One reason the US has been doing better than Europe and Asia is because exports have been stronger than expected. It has benefited from the fact the euro remains relatively high, a reflection of the fact that monetary, fiscal and regulatory policies have all been tighter than they should be, despite the expectation that at some point European governments will reverse those policies and the euro will ultimately go to parity with the dollar.
Still, the world should not take too much pleasure from a slowing China. A slowing China means less export orders for the rest of the world and (as officials later suggested in private meetings around that lunch) fewer buy orders for the rest of the world’s debt. If China slows, it may well be more of a problem for the rest of the world than for China itself.
Copyright The Financial Times Limited 2011.
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