Analysis: More than decoupled
From Reuters BEIJING | Tue Oct 26, 2010
BEIJING (Reuters) - What's weak is strong, what's down is up, what's loose is tight - pretty much everything that defines the American and European economies these days finds its diametric opposite in China.|
Data and policy moves over the last week have driven home the point that China is increasingly in a league of its own.
The world's second-largest economy is growing near a double-digit pace, inflation is picking up and the government definitively stepped up monetary tightening last week with its first interest rate increase in nearly three years.
Two years on from the global financial crisis, the contrast with the rich world is striking. In the United States and Europe, growth is sluggish, a slump into outright deflation is a real risk and central banks look set to loosen policy further.
So the evidence is in: China is decoupled, influenced by, but ultimately independent from other major economies.
"The crisis was a test and China passed the test. Decoupling has become a much more solid thesis now than three years ago when we only talked about it hypothetically," said Qing Wang, Morgan Stanley's chief economist for greater China.
One of the knocks against the decoupling thesis in the past has been that China, with its currency closely tied to the dollar, cannot carve out its own monetary policy.
A widespread assumption before last week was that the People's Bank of China would need to wait for the Federal Reserve to raise rates before doing likewise, condemning it to a choice between importing easy money or breaking the link by allowing more yuan appreciation.
"China sent a message to the rest of the world. They do have what they consider an independent monetary policy. They don't have to solely rely on their exchange rate as a policy tool," Wang said.
What Export Reliance?
China is so often described as an export-dependent economy that people can be forgiven for thinking that this is true - that it is inextricably coupled to external demand. It is not.
Looked at on a value-added basis, exports contribute about 17 percent to Chinese growth, Kevin Lai, an economist with Daiwa Capital Markets in Hong Kong, said.
While not negligible, this is far lower than other Asian countries from South Korea to Singapore.
"For Asia in general, decoupling hasn't happened yet," Lai said, noting that Asia consumes just 22 percent of its own exports. "But whether Asia is decoupling or not, China is not so dependent on exports."
And that dependence has waned since the financial crisis. Exports will make a tiny contribution to Chinese growth this year, with the trade surplus stabilizing below $200 billion.
Yet not everyone is a fan of the decoupling thesis. Andy Rothman, China macro strategist with CLSA in Shanghai, says it misses the point.
The source of China's outperformance over the past two years has not been its separateness from the rest of the world, but rather success on a range of policy fronts, he said.
It had a far less leveraged housing sector, a well-implemented stimulus package, a much healthier government fiscal position and continued expansion of health care coverage that is helping to reduce precautionary saving.
"They've been doing a lot of the things that the United States said it wanted to do, but didn't seem to be able to actually accomplish," Rothman said.
The Yuan Linkage
China may have gone its own way with last week's interest rate rise, but the fact is that the yuan's tethering to the dollar still limits its policy decoupling.
The dollar's recent tumble means that China has been paying an increasing amount for key commodity imports, posing an inflationary risk and eroding its terms of trade.
It is no coincidence that Beijing sped up the yuan's rise over the past two months.
"More rapid yuan appreciation was not a response to pressure from Washington, but was a response to dollar weakness. It was as simple as that. They have to protect their own purchasing power," Lai said.
Dong Xian'an, chief economist with Industrial Securities in Beijing, predicts the government may later this year delink the yuan further from the dollar, allowing it to fluctuate by more than the current daily limit of 0.5 percent.
"This will help to make monetary policy more flexible and independent," he said.
Nevertheless, in another dimension, China is on track to couple itself more tightly with developed economies. Beijing's rigid capital controls have acted as a breaker, preventing global financial turmoil from washing onto its shores.
Now, bit by bit, China is promoting the yuan's use abroad and giving investors more channels through its capital account, such as in the decision to let foreign holders of yuan buy domestic bonds.
"For a country to be completely immune from volatile developments in the rest of the world is another way of saying this country is isolated from the rest of the world," Wang said.
"If China becomes more open, it will be more exposed."