12.05.07

Is China headed for a post-Olympics slowdown?

Posted in Strategies, Economic Analysis, Exchange Rates at 8:58 pm by Administrator

At the annual Business Climate Finance Outlook of the German American Business Association of California (www.gaba-network.org), Robert Prion of Citi Private Bank noted that his bank had lowered world economic growth estimates because of the US home mortgage crisis and because of an expected slowdown in China after the Olympics.

In China, the economy remains overheated, in part due to the dollar-pegged exchange rate. Because it is a non-reserve currency and is running a huge trade surplus, the Bank of China has had to undertake major sterilization operations to stop the money supply blowing up because of potential injections of dollars into the Chinese economy. The Chinese authorities have avoided taken the necessary adjustments (allowing the Yuan Renminbi to appreciate or significantly raising interest rates). (It should be noted that the government consolidated all credit decisions last week — a good first step.) However it appears that Beijing wants to wait until after Olympics to apply the brakes.

This is very reminiscent of what happened in Spain during their Olympic year of 1992. I was the economic attaché at the US Embassy during this period. The Spanish had pegged the peseta to the Deutsch Mark in the 1980’s and pumped up the economy with a major public works program to build infrastructure for the Olympics. (Spain was one of the fastest growing countries in the world in the 1980’s.) Shortly after the Olympics finished, Felipe Gonzalez took the necessary corrective actions, which led to his losing power to Aznar.

So in terms of strategy, my advice would to be to plan for a weaker Chinese market and an appreciation of the Renminbi.

What are your thoughts?

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