Recession in China is likely, strong domestic demand...

iles Chance sent his views on the current issues facing China and the 'the Olympic non-rally' to Hedge Funds. He is the portfolio manager of the APAC Greater China Fund (Hong Kong).

The current issues facing China's economy
In common with other major economies around the world, China's economy is facing a combination of slowing growth and rising prices - the ugly 'fourth quadrant' (in a two-factor chart of growth and inflation), which is associated with the last stage of a growth period, and is often a prelude to recession.

However, in China we do not see a recession as likely, even if the slowdown in the US and Europe is a prolonged one, because of the strong upward trend in Chinese domestic demand which is amply funded by domestic private and public savings. We do see a stubborn inflation problem and a fall in 2009 in the Chinese GDP growth rate to nearer 9% from the current 10% or so, led by weaker exports and reduced corporate profits as a result of rising costs. Against the US dollar, China's currency may not appreciate much, or may even fall through 2008, particularly if the US dollar continues to strengthen. The RMB may continue falling against the Euro, but at a slower rate as the Euro weakens. In these cases the RMB will become less attractive to hot money inflows, most of which we believe emanate from dollar-linked monetary systems. Combined with the new larger foreign currency holding limits for Chinese corporates and stricter policing of foreign currency trading, we may see some moderation in 'hot money' inflows into the Chinese monetary system.

Inflation - We have seen three months of a falling Consumer Price Index in China, with consumer prices rising in July at 6.3%, down from a 12-year high of +8.7% in February. But the most recent Producer Price Index report (for July) showed a year-on-year price gain of 10%, so the prices of goods leaving Chinese factories are still rising significantly...

Source:
http://www.opalesque.com/AMB2008/46545Recession_in_China_is_likely_strong_domestic.html


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