Shocked to the proverbial bone Bloomberg reported that "China's economy, the biggest contributor to global growth, expanded at the slowest pace in five years as the financial crisis cut demand for exports. Gross domestic product rose 9 percent in the third quarter from a year earlier."
Economy got SARS?
To juice up the news, Bloomberg said that "China's expansion was the weakest since the severe acute respiratory syndrome, or SARS, epidemic slashed growth in the second quarter of 2003."
This brings back scary memories of China coming to a grinding halt for months, while everybody had to stay home and was allowed to go to the shop once a week only. Soldiers in HAZMAT gear watched the lines. A cough, a fever, and it was off to the camps. That's how bad it is, Bloomberg wants us to think. While in reality, Mayor Bloomberg's city currently might be worse off than Beijing.
9% growth? That it?
Business folk all over the world would give their left eye or even more sensitive parts for 9% growth. Correction: A 9% rise of GDP could scare the rest of the world into believing that central bankers would raise interest rates to prevent more inflation.
Look at it this way: China simply goes from an unhealthy, unsustainable, and inflationary double digit growth to a more manageable level.
Sure, export growth in China slowed substantially. It had to. Since the second half of 2007, the Chinese government tried everything to push down exports to a more sustainable level.
Points to consider:
- Retail sales in China rose 23.2 percent in September from a year earlier, same in August. That was close to the fastest pace in at least nine years. No buyer strike in China.
- Urban disposable incomes for the first nine months rose 14.7 percent from a year earlier. Rural cash incomes climbed 19.6 percent. People have money.
- The formerly red-hot Chinese light vehicle market (which includes passenger vehicle and light commercial vehicle segments) is expected to slow in 2008, but it still will grow at very healthy rates. J.D. Power expects Chinese light vehicle sales to come in at 8.9 million units in 2008, which would be an increase of 9.7 % compared to 2007.
- Much of the decline in exports had its cause in the appreciation of the RMB. That was actually a reflection of the rapid depreciation of the USD which took place until July 2008. As gasgoo.com said, "for most local auto parts makers, the impact on exports brought by the demand slowdown of the global market triggered by the financial crisis will be less than that of the RMB appreciation." Exports had been sinking steadily for the whole year.
The Chinese stock market knew it all along.
From a high of 6000 at the beginning of 2008, the Chinese stock market eroded to around 2000 now. > without most outside the country even noticing. Since January, the Chinese stock market lost more than 60% of its value, a huge bubble burst, without an echo in the rest of the world.
The Dollar comes back. The Yuan barely moves.
If anybody has noticed, the USD took a sharp turn and appreciated dramatically since July. Now is this reflected in the USD/CNY currency pair?
Have a look at the chart. Until July, the Yuan pretty much appreciated against the USD as the Euro did. The Dollar went down, the Euro and the Yuan went up.
What happened when the USD started rising like mad, starting in July? The USD/CNY rate barely budged. The EUR/CNY rate did move.
Bloomberg said that the Chinese "central bank has stalled gains by the Yuan against the Dollar since mid-July, protecting jobs in export industries."
No so. All indicators say they did just the opposite. When the Yuan should have gone down sharply against the rising USD, the Yuan barely moved.
The chart says that the Chinese central bank may have propped up the Yuan against the US Dollar. China also took other measures to cool down their overheating export machine, such as not refunding parts of the VAT for exports, and actually charging export tax on certain items.
Yuan should fall.
Expect the USD/CNY rate to change radically within the next months, latest after the U.S. elections. We expect the Yuan to drop against the USD, the easiest way for the Chinese government to make Chinese exports more attractive. In the first half of 2008, this would have been a rather unpopular move. But now, the world has other problems than watching the CNY/USD currency pair. If anyone does complain, the obvious explanation is that in light of the strength of the Dollar, the Yuan must follow suit and go down.
And when the USD will drop, as it should when America cranks up the presses to print money to finance the bailout and two wars, the Chinese can keep the USD/CNY level, and make their goods even cheaper in Euro terms.
More measures possible:
The tax measures designed to dampen exports will most likely be lifted. Sinking commodity prices and record-low transport prices make low wage countries like China even more competitive.
Like it or not, China is the country that keeps the world economy alive. The Chinese have the incentive and financial wherewithal to keep it that way. They have nearly unlimited room to grow, while Western markets are saturated, and while especially European and Japanese demographics indicate shrinking markets. Out of this recession, China will emerge stronger than ever.
Economy got SARS?
To juice up the news, Bloomberg said that "China's expansion was the weakest since the severe acute respiratory syndrome, or SARS, epidemic slashed growth in the second quarter of 2003."
This brings back scary memories of China coming to a grinding halt for months, while everybody had to stay home and was allowed to go to the shop once a week only. Soldiers in HAZMAT gear watched the lines. A cough, a fever, and it was off to the camps. That's how bad it is, Bloomberg wants us to think. While in reality, Mayor Bloomberg's city currently might be worse off than Beijing.
9% growth? That it?
Business folk all over the world would give their left eye or even more sensitive parts for 9% growth. Correction: A 9% rise of GDP could scare the rest of the world into believing that central bankers would raise interest rates to prevent more inflation.
Look at it this way: China simply goes from an unhealthy, unsustainable, and inflationary double digit growth to a more manageable level.
Sure, export growth in China slowed substantially. It had to. Since the second half of 2007, the Chinese government tried everything to push down exports to a more sustainable level.
Points to consider:
- Retail sales in China rose 23.2 percent in September from a year earlier, same in August. That was close to the fastest pace in at least nine years. No buyer strike in China.
- Urban disposable incomes for the first nine months rose 14.7 percent from a year earlier. Rural cash incomes climbed 19.6 percent. People have money.
- The formerly red-hot Chinese light vehicle market (which includes passenger vehicle and light commercial vehicle segments) is expected to slow in 2008, but it still will grow at very healthy rates. J.D. Power expects Chinese light vehicle sales to come in at 8.9 million units in 2008, which would be an increase of 9.7 % compared to 2007.
- Much of the decline in exports had its cause in the appreciation of the RMB. That was actually a reflection of the rapid depreciation of the USD which took place until July 2008. As gasgoo.com said, "for most local auto parts makers, the impact on exports brought by the demand slowdown of the global market triggered by the financial crisis will be less than that of the RMB appreciation." Exports had been sinking steadily for the whole year.
The Chinese stock market knew it all along.
From a high of 6000 at the beginning of 2008, the Chinese stock market eroded to around 2000 now. > without most outside the country even noticing. Since January, the Chinese stock market lost more than 60% of its value, a huge bubble burst, without an echo in the rest of the world.
The Dollar comes back. The Yuan barely moves.
If anybody has noticed, the USD took a sharp turn and appreciated dramatically since July. Now is this reflected in the USD/CNY currency pair?
Have a look at the chart. Until July, the Yuan pretty much appreciated against the USD as the Euro did. The Dollar went down, the Euro and the Yuan went up.
What happened when the USD started rising like mad, starting in July? The USD/CNY rate barely budged. The EUR/CNY rate did move.
Bloomberg said that the Chinese "central bank has stalled gains by the Yuan against the Dollar since mid-July, protecting jobs in export industries."
No so. All indicators say they did just the opposite. When the Yuan should have gone down sharply against the rising USD, the Yuan barely moved.
The chart says that the Chinese central bank may have propped up the Yuan against the US Dollar. China also took other measures to cool down their overheating export machine, such as not refunding parts of the VAT for exports, and actually charging export tax on certain items.
Yuan should fall.
Expect the USD/CNY rate to change radically within the next months, latest after the U.S. elections. We expect the Yuan to drop against the USD, the easiest way for the Chinese government to make Chinese exports more attractive. In the first half of 2008, this would have been a rather unpopular move. But now, the world has other problems than watching the CNY/USD currency pair. If anyone does complain, the obvious explanation is that in light of the strength of the Dollar, the Yuan must follow suit and go down.
And when the USD will drop, as it should when America cranks up the presses to print money to finance the bailout and two wars, the Chinese can keep the USD/CNY level, and make their goods even cheaper in Euro terms.
More measures possible:
The tax measures designed to dampen exports will most likely be lifted. Sinking commodity prices and record-low transport prices make low wage countries like China even more competitive.
Like it or not, China is the country that keeps the world economy alive. The Chinese have the incentive and financial wherewithal to keep it that way. They have nearly unlimited room to grow, while Western markets are saturated, and while especially European and Japanese demographics indicate shrinking markets. Out of this recession, China will emerge stronger than ever.
About the Author:
About the author: After having worked as a Marketing Consultant for Volkswagen AG for three decades, Bertel Schmitt changed sides in 2005 to found Hongkong, Beijing, and Hamburg based Sinamotive, a company specialized in sourcing low cost high quality auto parts in China. The company supplies many European wholesalers. Schmitt also is author of a blog about the Chinese auto industry.
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