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Shaky markets could still undermine China’s global economic lead
Published: 18 May, 2010, 11:38
Edited: 21 May, 2010, 12:08
TAGS: Investment, Manufacturing, Markets, Asia, Economy
Europe's debt crisis is not just threatening prosperity in Eastern Europe and Russia, it's also likely to have an impact on the world's biggest emerging economy, China.
China’s commercial might is currently on display at the world expo in Shanghai. Among attendees at the Shanghai Expo are large economies like France, Russia and the United States but also Ukraine and Greece – both living off the IMF loans.
While most developed countries struggled with the financial crisis last year, China still managed to post world-beating growth of 8.7%. China has now become such a centre of gravity for commerce that no nation can afford to be left out, says Yaroslav Lissovolik, Chief Economist at Deutsche Bank Russia.
“There is a lot of dynamism in the East Asian region, certainly throughout the crisis we have seen higher growth rates in Asia compared to Europe and generally the developed world and I think in the coming years that will probably be still the case.”
Major global political figures have attended the, with China currently the locomotive of the worlds economic recovery. Expo 2010 is meant to increase faith in the global economy by looking into the future with innovative technology suggested as a way for recovery.
But that recovery is still uncertain. And the clouded outlook in Europe is threatening to put even China in the shade, says Chris Weafer, Chief Strategist at Uralsib.
“While they can produce cheaply they have to sell it to US and Europe. If they don’t want to buy it will have an effect on China, and those social problems could come earlier. China is in a very weak position as their fate is tied up with what happens in the US.”
Europe's debt crisis spells double trouble for Chinese exporters. Not only are consumers likely to buy fewer goods when times are hard, but the dramatic fall in the value of the euro against the Yuan – 15 % in 4 months – also makes them much more expensive.
China's trade balance which stood at $200 billion in 2009 might shrink by as much as a half this year, according to some economists.
This may bring more balance to international trade, but it will also provide a further drag on an already stuttering recovery.
18.05.2010, 10:49
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To avoid the present situation China has to go from pegging the yuan to the USD to peggin it to a basket of currencies (Euro/USD) The Russian rouble could be also part of that basket of currencies in the future. The peg to the USD means that now, with the Euro devalued 30% Chinese exports are becoming expensive. Add that the oil barrel (in $) has increased to almost $80 and wages are also increasing....and Chinese products are losing competitiveness to Mexico, Eastern Europe, Turkey or Morocco...
While it is not clear how far this crisis will go, and if it will create another liquidity crisis, the trade issues are not that simple. China depends on imports from Germany to keep its factories supplied with precision tools and machines. These will become much cheaper for China. It is not clear that the exports to Eurozone will fall off. In times of economic belt-tightening, Chinese products can be very competitive on European market. It is far too early to figure this all out. As for oil, it is a mystery. It makes no sense that it is rising and falling in concert with Dow Jones Industrials. But this seems to be the pattern. Stock market on its way up saw oil go up, and now is going down. There is some form of distortion somewhere, as the cost of production, transportation and refining is not going down. Once this distortion clears, oil prices will have to go up --- way up. The explanations based on currency valuation change (i.e., stronger dollar) are not sufficient. At some point, when the markets give up the idea of REFLATING, and the resignation sinks in, markets will settle at the new lows. At that point, some realistic pricing will commence, as at this level, the total cost of exploration, extraction, transportation, etc. exceeds the price on the market.