World worries as China growth slows

http://www.radioaustralia.net.au/programguide/stories/200810/s2392302.htm

Updated Wed Oct 15, 2008 8:50pm AEST

As the credit crisis has spread over the past year, China has been viewed as an island of calm in the sea of financial turmoil. Its economy was seen as providing an export safety net for commodity suppliers like Australia. Now with its turbo charged growth slowing, how long can China hold out against the rapidly turning economic tide?


SNOWDON : Less than a week ago, Australia's Prime Minister was reassuring Australians the economy was well placed to withstand the financial crisis because of two main factors, the strength of the local well regulated banks and the strength of China. The surprise release of a seven billion US dollar economic stimulus package on Tuesday was a clear sign how quickly the ground has shifted. Kevin Rudd says the Government is preparing for a worsening of the storm.
That includes much slower growth in China. Bob Broadfoot is the Managing Director of the Political and Economic Risk Consultancy.


BROADFOOT: There's not an economy in the world unless its cut itself off like Burma that's going to be unscathed.

SNOWDON: Some economist are forecasting just 8 per cent growth for China next year, down from 12 last year. China too is taking action. Authorities have cut interest rates twice in a month. Policies that tried to limit the amount of hot money flowing into capital works have been partially reversed to boost investment. Yet businesses are closing, jobs are disappearing, house prices are falling, the stock market has lost half its value this year. Professor Zhang Jun, Director of the China Centre for Economic Studies at Fudan University says east coast companies are already suffering as exports shrink. 50% of toy manufacturers for example have closed this year, a combination of product recalls and lower demand.

ZHANG: And I'm sure we're going to see the beginning of industrial restructuring in factories especially in the export sector.

SNOWDON: China and the world is hoping domestic demand will fill the gap, a shift of profound proportions says Professor Zhang.

ZHANG: It is definitely going to produce a profound impact on the macro economy of China and on the global economy as well. Because the global economy definitely needs a shift in the large amount of demand from America, from Europe and onto Asian emerging markets. I think China is going to play a very important role.

SNOWDON : It's true the financial system has been protected from the global turmoil because it remains partially closed to the world. It also means more reforms are most likely to be put on hold. And in a sign China doesn't want to be caught unprepared, a new committee is being set up to monitor financial developments overseas and adjust economic policies. Confidence is especially low in housing and capital markets, and government action is needed to kick start them says Professor Zhang Jun

ZHANG: So we need to revital the capital market and the housing market to keep people's confidence in the Chinese economy because temporarily its been so bad you know its been declining very rapidly.

SNOWDON: Relying on a surge in domestic demand might be difficult. The government has a lot of money to spend on its big infrastructure projects. But the Chinese people are less keen to spend their money .especially in uncertain times, .they're the world's best savers, putting away 40 to 50 % of earnings. Plus the average annual income is also still only around 15-hundred US dollars.

BROADFOOT: They are the government's top priority right now. Its no longer fighting inflation That's what it can do to promote a more stable global economy
environment it to try and promote more growth in Chian So I think they'll be doing what they can to stimulate it at home.

SNOWDON : Bob Broadfoot sees real trouble ahead in China's housing market. He says a bubble is ready to burst, plus rising stockpiles of unsold cars and household goods like refrigerators spell bad news for commodities...and their suppliers like Australia. Definitely, .the change in demand in China at this particular point in the global environment will be a factor to cause those prices to nosedive in the next six months.