Is China de-coupled from the US economy?

These are two articles on the Chinese economy and the effect of a US downturn on its economic growth. Even pessimistic projections place Chinese economic growth at over 9 per cent this year, certainly not much like a recession. Up until now China was worried about growing too quickly. With its environmental problems a slow-down is probably positive and it may be helpful in terms of domestic consumption versus export. The first article is from the Wall Stree Journal.

OnlineJanuary 24, 2008China Turns Its Attention To Maintaining MomentumBy ANDREW BATSONJanuary 24, 2008BEIJING -- Even as China reported today a second year of annual growthabove 11%, the prospect of a U.S.-led global economic slowdown lookedlikely to force a shift in priorities: from curbing the boom tosustaining momentum.The government wants to generate 10 million urban jobs this year.Delivering that is likely to mean a sharper focus on the domesticeconomy, after a period when trade has been a big growth driver.China's export engine started to slow near the end of the year, andthe wider effects of that are already being felt. Economic growthpeaked at 11.9% in the second quarter, then eased to 11.5% in thethird. In the fourth quarter, the economy grew 11.2%, China's NationalBureau of Statistics said today in Beijing. For all of 2007, grossdomestic product expanded 11.4%, the bureau said.Some exporters, seeing orders from the U.S. fall off, are planning totrim staff, which could feed into a broader impact on households andconsumer spending. That is happening even as inflation in Chinaremains high, and as drops in stock markets and property prices alsothreaten to erode savings."The economic and financial conditions at home and abroad will be morecomplicated in 2008, and China is facing tougher challenges insustainable economic and financial development," Jiang Dingzhi, vicechairman of the China Banking Regulatory Commission, said this week.Top leaders are now still focused on combating inflation that reachednearly 5% in 2007. They have resorted to freezes in prices ofelectricity and fuels, and price controls on some foods. Thatinflation's persistence limits the government's ability to lift theeconomy through measures like interest-rate cuts.That could change quickly if inflation moderates and the U.S. andEurope continue to take a turn for the worse. "I think the governmenthas already started to pay attention to the possibility of a U.S.recession," says Zuo Xiaolei, chief economist for China GalaxySecurities in Beijing. Though even the most pessimistic forecasts callfor China's growth to ease to 9% or so this year, that would be asharp relative slowdown. "They should stimulate domestic consumptionto compensate for the loss of external demand," she says.Indeed, Chinese authorities have a track record of respondingaggressively to external economic slowdowns. In 1998, during the Asianfinancial crisis, a huge influx of government cash helped keep theeconomy growing by nearly 8%. Yet such efforts to boost the economyalso carry the risk that China could end up in a damaging downturnwhen the boost runs out.A boom in construction of housing, infrastructure and new factorieshas been the major driving force of China's expansion in recent years.Such investment has been so fast that many officials worry that moreis being built than is really needed. To avoid excess capacity, thegovernment has repeatedly moved to curb investment and warned thatfuture growth will have to be less reliant on such spending. But thoseconcerns may fall by the wayside if the leadership decides moreinfrastructure projects are needed to offset weaker exports."If the major economies do retrench fairly heavily, then maintaining adegree of growth that is consistent with social stability will requirea boost in construction and investment," says Glenn Maguire, Asiaeconomist for Societe Generale. A concrete increase in jobs could welloutweigh the more abstract worry of excess capacity or wastedinvestment. So, he says, "We may see a temporary pause in this desirefor more balanced growth."There is plenty of such spending under way. China's Ministry ofRailways earlier this month announced a major step-up in constructionof new railroads this year, with official plans calling for spendingabout $41 billion to lay 7,820 kilometers of new track. And withChina's cities growing by 18 million people a year, according toUnited Nations estimates, it wouldn't be difficult to speed upconstruction of housing and public works. About 10 major cities,including Beijing but also places like Chengdu, Wuhan and Guangzhou,are now building or expanding subway systems -- but there are severalothers whose plans are still waiting for approval.Similarly, most analysts expect fewer of the tax and regulatorychanges that were pushed through last year to limit exports of someproducts, mostly raw materials or those whose manufacture generateshigh pollution. Such measures were a response to the problems of thewide trade surplus, which had brought political friction with the U.S.and Europe, and flooded banks with cash they were ill-equipped todeploy properly.Yet as the U.S. economy has weakened, official talk of curbing thetrade surplus has subsided. Export growth slowed from about 29% in thefirst half of 2007 to around 22% in the second half, and thegovernment is once again concerned about aiding exporters. "Companies'exports are facing new pressure ... the task of stabilizing exports isvery heavy," Minister of Commerce Chen Deming said in a speech lastweek.A mild global slowdown could actually ease some of China's recenteconomic problems: domestic food prices that are being pushed up inpart by tight global agricultural markets, and a banking systemflooded with cash from an ever-expanding trade surplus. Governmentthink tanks are forecasting only a modest slowdown in economic growththis year, in the range of 10% to 11%, which is considered desirablegiven the strains that growth in excess of 11% has brought.But a big shock to the export sector that leads to an increase inunemployment would be a different matter."Although the current slowdown in export growth helps alleviate thetrade surplus and external imbalances, our nation still faces greatemployment pressures," argues Fan Caiyue, an economist for theNational Development and Reform Commission, in an article this week."We still need to maintain a certain amount of export growth, so ifexports substantially decline, it is not beneficial to maintainingstable and fast growth in our nation's economy."To reduce China's vulnerability to trade fluctuations and investmentcycles, the government over the past couple of years also has beentrying to encourage its consumers to spend more and save less. Yetwhile public-works projects can start up quickly, changing spendinghabits can take longer, and there hasn't yet been a big acceleration.After accounting for the effects of inflation, retail sales were up12.8% last year through November, little changed from the 12.7% pacein 2006.This year, officials are continuing to roll out policies designed toput more money in consumers' pockets, like higher minimum wages, andthey are continuing to expand new health-care and social-securityprograms to reduce the burden of those costs.

Here is the second article from the Economist:

An independent streakJan 24th 2008 HONG KONG>From The Economist print editionINVESTORS were until recently big fans of the "decoupling" theory, thenotion that Asian economies can shrug off an American recession. This week'splunge in share prices, at one point taking the MSCI Emerging Asia Indexdown 25% from its October high, suggests they have changed their minds. Butthe fact that their stockmarkets are still coupled does not mean that theireconomies will follow America over a cliff.Decoupling was always a misnomer if it implied that an American recessionwould have no impact in the East. Exports and hence profits would certainlybe squeezed; some fear Japan may even be tipping back into recession.Instead, the real argument in the rest of Asia was that it would suffer lessthan in previous American downturns.As well as hitting exports, America's troubles could also affect emergingAsia through financial channels. Its exposure to the subprime mess isthought to be smaller than that of American or European banks. Even so,Chinese bank shares tumbled this week on reports that they would have tomake bigger write-downs on their holdings of American subprime securities.And if shares slide further as global investors flee from risky assets, thiscould dampen business and consumer confidence in the region.Some Asian economies are more vulnerable than others. Singapore, Hong Kongand Malaysia are the most exposed, with exports to America equivalent to 20%or more of their GDPs, compared with only 8% in China and 2% in India. Thereare already some ominous signs. Singapore's exports to America are down by11% over the past year, whereas Malaysia's fell by 16%. Exports to otheremerging economies and to the European Union surged, so total exports stillgrew by 6% in both economies. But that was much slower than at the start of2007, and the worry now is that demand from Europe has started to flag.The growth in China's exports to America slowed to only 1% (in yuan terms)in the year to December from over 20% in late 2006. So far the impact on GDPhas been modest. Figures published on January 24th showed that China's GDPgrew by a sizzling 11.2% in the year to the fourth quarter, down from 11.5%in the previous three months. Most economists expect growth to slow to astill-healthy 9-10% this year, but there are growing concerns that newgovernment limits on bank lending risk choking the economy.China's economy would probably still expand by around 8-9% even if exportgrowth dried up. During the 2001 American recession China's GDP growthbarely slowed. In contrast, Hong Kong, Singapore, Taiwan and Malaysiasuffered full-blown recessions, with growth rates falling by more than tenpercentage points from peak to trough. America's slump is likely to bedeeper than in 2001 and Asia is now more integrated into the global economythan it used to be. Doomsters conclude, therefore, that these economiescould be hit even harder this time.The main reasons to be more optimistic are that domestic demand (consumerspending and investment) is likely to remain stronger and that governmentshave more flexibility to offset America's malaise. Last year, despite aslowdown in America's imports, most Asian economies grew faster as domesticdemand sped up everywhere except Thailand. Robert Prior-Wandesforde, aneconomist at HSBC, says that those who argue that Asia cannot decouple fromAmerica are ignoring the fact that they already have. Take Malaysia: itsexports to America plunged, yet its GDP growth quickened from 5.7% at theend of 2006 to 6.7% in the third quarter of last year.Contrary to the popular view that Asia's meltdown during the 2001 recessionwas entirely due to a slump in exports, Peter Redward, at Barclays Capital,argues that a fall in investment played a bigger role. Too much debt andexcess capacity weighed down firms, particularly in the electronicsindustry, which was at the heart of the American recession. Today firms arein much better shape. Capacity utilisation is high across the region;outside China, investment as a share of GDP is historically low; companybalance-sheets are stronger and real interest rates are low. Firms aretherefore less likely to slash investment than in 2001.Slowing exports will affect domestic spending. But macroeconomicfundamentals are much healthier in East Asia these days. Largeforeign-exchange reserves make countries less vulnerable to shocks. Budgetsare in surplus or close to balance, providing more scope for fiscal stimulusto support growth.For all these reasons, even if Asia's exports clearly have not decoupledfrom America, its economies will be less hurt by a recession there than inthe past. Standard Chartered forecasts that emerging Asia will grow by anaverage of 6.4% in 2008, down from 7.8% in 2007. In 2001 growth dropped bythree percentage points, to 4.2%. Financial markets were slow to realisethat growth and hence profits in some countries in emerging Asia will bedented by an American downturn. But now they risk exaggerating the potentialdamage.