Is China planning to use a slowdown in the U.S. economy as an excuse to slow its own economy in 2008?
Sure looks like it: Nov. 15 gave investors the first clue of how China would justify the kind of economic pain it needs to inflict on its people in order to stop runaway inflation and financial speculation. The solution? Blame a U.S. economic slowdown for a plunge in Chinese export growth that will put an end to China's double-digit economic growth.
Certainly, putting the blame overseas is a whole lot easier politically than taking the heat for deciding the economy has to slow in the short term for China's long-term health.
As the Shanghai stock market climbed 130% in 2006 and then 101% this year (as of Nov. 15), investors chanted the mantra "No correction before the August 2008 Beijing Olympics" to persuade themselves to stay aboard the speeding train.
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The theory -- and I think it's correct -- is that the Chinese government won't risk crashing the economy or the stock market and putting tens of thousands of protesters in the streets while the world's attention is focused on Beijing for the Olympics. No matter how serious inflation gets, no matter how overheated the financial markets become and no matter what speculative frenzy sweeps through the real-estate markets, the government won't risk rocking the boat.
After the August Olympics, however, all bets are off, this market theory continues. Expect the Chinese government to raise margin requirements, boost interest rates big time, institute stock market trading curbs, force banks to cut back on loans by requiring more capital in reserve and slow the runaway growth in the country's money supply.
The fixers in BeijingThat's fine as far as it goes. But the theory has always been vague on how the Chinese government would sell a program of short-term economic pain to the average Chinese investor and worker after the Olympic torch was extinguished. I don't think cutting millions of investors' portfolios in half or laying off millions of workers in the name of something abstract such as long-term economic health would fly.
No, Beijing doesn't want thousands of protesters in the streets during the Olympics, but the Chinese government isn't keen on the idea of massive demonstrations after the games are over, either.
But putting the blame on an economy far away and run by foreigners -- ah, that's another matter entirely. Then the pain isn't the result of Chinese government policy. It's just something that happens or that foreigners did to China. Beijing can claim it's doing all it can to fix a problem created by someone else. The people and the People's Republic will be on the same side.
This political solution started to unfold with Nov. 15 warnings from China's Ministry of Commerce that a slowdown in the U.S. economy would "devastate" Chinese exports.
"If demand in the U.S. drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders," says a report posted on the ministry's Web site. "If exports see a sharp decline, it could suggest a turning point for this round of our economic growth."
A slowdown in export growthThe growth of exports to the United States, China's second-largest export market after the European Union, has slowed sharply this year, the report continues. In the first quarter of 2007, exports to the U.S. climbed 20.4% from the first quarter of 2006. In the second quarter, the year-to-year increase dropped to 15.6%. And in the third quarter, year-to-year growth dropped to 12.4%.
That's the kind of huge shift you'd expect as the U.S. economy slowed, according to the People's Bank of China, the country's central bank. Each percentage-point drop in U.S. economic growth, the bank has calculated, causes a 6-point drop in Chinese exports.
And just in case readers of this report missed the message that foreigners were to blame for China's export slowdown, the report hammers it home. "U.S. interest rates are moving in the opposite direction from our interest rates and this will offset our efforts to control domestic inflation and overheating property and stock markets," says the report, which has been widely disseminated in official Chinese government newspapers.
The report says continued turmoil in financial markets in the U.S. and other developed economies would send more hot money into China, making the government's job of controlling the Chinese economy and financial markets even harder.