Monday, October 20, 2008

Chinese Growth Declines

Chinese economic growth fell to 9% in the third quarter, the lowest since 2003. The two main factors behind this is the slowdown in exports growth and the Olympic Games. Some would have perhaps thought that the Olympics would boost growth, but because factories in the Beijing area were closed down, it probably lowered growth. What was most remarkable though was that domestic demand held up very well, with retail sales rising 23.2% in nominal terms in the year to September. That nominal retail sales growth stays that high even as inflation is falling implies that real retail sales growth is in fact rising.

One reason why domestic demand so far has held up better than in other parts of the world is that the Chinese financial system (specifically its credit system) is less integrated with the rest of the world. This means that apart from the decline in the stock market and the slowdown in exports, China is not affected by the financial turmoil. Of course, these aren't insignificant factors and that is why economic growth has in fact fallen. And it might in fact have fallen even more than these numbers suggest as Chinese statistics are even more unreliable than in other countries.

It remains to be seen to what extent the reversal of its previous tightening measures can compensate for the negative effects of the worsening global turmoil.
What is clear though is that a further slowdown in Chinese growth would be bullish for the U.S. dollar as it would make the Chinese central bank boost its dollar purchases and it would be bearish for commodities both because of the stronger dollar and because of the reduction in demand.


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