China General Interest
In this extract from China Watch, David Mahon, Managing Director of Mahon China Investment Management, addresses the question of how resilient the Chinese economy will be in the midst of the global financial crisis.
At the beginning of this year, concerned by steep inflation of food and property prices, the Chinese leadership acted to slow economic growth. The resulting credit controls were too severe and the economy slowed faster than the government intended. Marginal exporters, particularly those in the textile sector, have found working capital hard to obtain and some, while also struggling with a currency that has increased nearly 9% since September 2007, have been forced out of business.
The Chinese government is now adjusting its policies to ensure that core domestic economic growth is not affected. This is a downturn of the government’s own making that is within its means to correct. It must now also deal with the effects of the economic storm that has engulfed the rest of the world.
Unless there is an inordinately prolonged global recession, the global financial crisis will not hurt the domestic Chinese economy to any great degree, although it has the potential to challenge the very principles of the free market forces that are still a topic of political debate in China.
Apart from exports, the other two drivers of GDP growth – domestic investment and consumption – are strong enough that China is likely to sustain growth rates in excess of 9% this year, and no less than 8% in 2009.
China is the world’s fourth largest domestic economy with a small, closed stock exchange, little international corporate debt and global investments in mostly conservative instruments. The Bank of China’s subprime exposure is approximately 5% of its total assets, while the other major banks have less than 2%. China does hold US treasury bonds in excess of US$400 billion, but since it has foreign currency reserves of US$1.9 trillion, it is in a position to wait out the crisis until the value of these bonds recover. With low utility prices, the percentage of total bank loans that are comprised of mortgages not exceeding 12% and urban savings rates remaining around 40%, the Chinese urban consumers form almost a mirror image of their Western counterparts.
Although there will be increased layoffs in the coming months, unemployment in China is low and ongoing government investments in infrastructure, housing, and the food and agricultural sectors will, over time, increase the wealth of both urban dwellers and farmers. It will still take China until the second quarter of 2009 to show the full degree to which it is an economic counterpoint to the rest of the world.
In the global economy, China is a reservoir of solvency and growth.
David Mahon is Managing Director and Chief Investment Officer of Mahon China Investment Management. David is also China Advisory Board Chairperson of the New Zealand Trade & Enterprise Beachheads programme.
Dec 4, 2008