China Continues To Land Orderly And Gradually

November 24, 2008 at 2:21 am Leave a comment

China – Those who insist that there is no decoupling at all between China and the United States may need to think twice. Meanwhile, those who claim that the two countries have completely decoupled would also have to think again. Recent statistics suggest that they have indeed decoupled to a certain extent. As to whether China would undergo a hard-landing, it all depends on how severe the impending recession in the United States would be. We maintain that the United States would slip into a mild technical recession and China
would undergo a soft-landing.
As expected, the y-o-y export growth of China in October 08 softened to a four-month low of 19.2% from 21.5% in September 08 (see Figure 1). The y-o-y export growth of China for the United States, the European Union member countries, the Asean member countries and Hong Kong had all slowed (see Figure 2). Both the United States and the European Union member countries account for no less than 40% of the total exports of
China. The 19.2% is slightly higher than the market consensus of 18.1%. The y-o-y export growth of China is not likely to pick up over the near term, as the y-o-y import growth dipped to a 12-month low of 15.6% in October 08 from 21.3% in September 08 (see Figure 3). Understandably, about two-thirds of the China imports consist of intermediate and capital goods.
While the y-o-y growth of retail sales in China softened from 23.2% in September 08 to a five-month low of 22.0% in October 08, it was still at an encouraging level (see Figure 4). This suggests that the job market in the country remains generally healthy and the local consumer spending still holds up quite well. A continued strong private consumption expenditure offers hope that the China economy would not be adversely
affected by the current global economic storms. It is important to note that household spending alone accounts for about 40% of the China economy.

What came as an unpleasant surprise is the y-o-y change in the Industrial Production Index for October 08, which dipped sharper than expected to 8.2% from 11.4% in September 08 (see Figure 5). It is admittedly an incipient sign of a hard-landing rather than a soft-landing, given that the manufacturing sector alone accounts for about 49% of the China economy. Nevertheless, one cannot rashly draw the conclusion just based on a single month of statistic. After all, other economic numbers are still pointing to a soft-landing
in general. Be that as it may, we cannot throw caution to the wind that the China economy would definitely not undergo a hard-landing, if the United States economy really slips into a deep recession.

——————–

The World – One does not have to be a pessimist to realise that the world economy is in trouble now. Neither does one need to be an optimist to expect that recovery would eventually take place one day. Nevertheless, what both pessimists and optimists are not sure about is how long the present economic slump would
continue and when the global economy would see light at the end of the tunnel. That explains why there would be three different possible economic scenarios for 2009. While economists and analysts commonly agree that the world economy will be slowing in 2009, they are generally divided on how long the present economic slump would continue and when the global economy would see light at the end of the tunnel. This
is understandable, as the sub-prime crisis is unprecedented and it has spread to almost every nook and cranny in the world. Further, the slowdown takes place against a background of high global inflationary pressure. Therefore, it is not sure whether or not it is right to entirely attribute the present economic slump to the sub-prime crisis. For optimists, it is only natural that they expect the best-case scenario. They believe that the United States economy would reach the trough in 4Q08 and make a strong and steady recovery in 1H09. As for the Euro Zone, they are sanguine that it would reach the trough in 1Q09 and make a strong and steady recovery in 2H09. In the case of China, they expect that the economy would stabilise at about 9% in 1H09, before gathering pace and growing at above 10% in 2H09. With such an encouraging global economic outlook in 2H09, it is reasonable for them to expect the Malaysian economy to grow significantly above
5% then.

For pessimists, they expect that the global economic situation would be at its worst for the whole of next year. Their projection is that the United States economy would slip into a severe recession in 2009 and there is no recovery in sight. Similarly, they expect that the economy of the Euro Zone would also slip into a deep recession next year. As for the China economy, it would slow sharply in 1H09 and the growth would be far below than the 8%-mark in 2H09. Given such a gloomy economic outlook in 2009, it is reasonable for them
to expect that growth in Malaysia would dip sharply in 1H09. For the whole of 2009, they expect the Malaysian economy to be stagnant or slip into a technical recession. For those who are reasonable and realistic, they look forward to a base-case scenario, where the global economy is expected to take a middle course. The United States economy is likely to reach the trough in 1Q09, and it would make a gradual and
bumpy recovery in 2H09. As for the economy of the Euro Zone, it would reach the trough in 2Q09 and record a moderate growth in the rest of the year. In the case of China, the economy would continue to soften in 1H09 and stabilise at around 9% in 2H09. With an expected moderate economic growth in the world in 2H09, the Malaysian economy is expected to pick up and grow above 5% then. Nevertheless, the growth of the domestic economy in 1H09 is expected to be sedate.
In fact, whatever fiscal and monetary policy measures that one can think of have been mostly announced or extensively carried out by now. They include aggressive policy interest rate cuts, massive capital injection into the financial system, multi-billion stimulus packages, to name but a few. If the policy measures are generally not effectual, we have every reason to fear the worst that the world economy would slip into a severe global recession over the next few years. On the contrary, the global economy would see light at the end of the tunnel next year if the policy measures are mostly workable.

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Banking Weekly Review : 10th – 16th November 2008 Telecommunications Weekly Review: 10th – 16th November 2008

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