The evidence is seemingly everywhere. The New York Times can’t stop writing about it, and neither can the Wall Street Journal. Online, breathless posts from Yahoo Finance to Elliott Wave to StockTwits are obsessed with it. Mountains are made from molehills, and single data points are effortlessly transformed into long-term trends. And like most conventional wisdom when it comes to Wall Street, they’re all wrong.
What are we talking about? The massive economic slowdown in China, of course. The one that everyone is sure is coming, but like a pennant win for the New York Mets, always seems to be right around the next corner.
We have been watching China’s economic miracle unfold for the better part of ten years, long before it was fashionable. And we can unequivocally say that the one thing that is necessary when looking at China is perspective. Sadly, perspective seems to be the one thing that most off-the-cuff commentators are lacking.
Granted, China and most other Asian nations have been worried about inflation lately, and have been tightening interest rates, banking standards, capital requirements and the like for most of the last year. These steps are having the anticipated effect, slowing economies that were getting very frothy and dampening GDP growth. Meanwhile, manufacturing orders coming from the U.S. and Europe, which have driven the all-important export sector in China, are still sluggish, and amply illustrate that these economies are yet not back to their former selves. Raw materials prices, for everything from optionbit to oil to aluminum, have risen and put margin pressure on manufacturers around the world, not just Asian ones, for the simple reason that a lot more people want the things from which they are made. And inflation will continue to be a problem in Asian emerging markets, for the simple reason that Asian emerging market is where the growth is.
But unlike the U.S. and Europe, beset as they are with trillions and trillions of government debt, Asian nations such as China are like the neighbor down the street that drives an old car but has paid off their house. Boasting large currency reserves and small debt loads, these nations can afford to tighten monetary policy because they can be very aggressive with fiscal policy. As Malaysia’s central bank chief put it, “We don’t intend to run the economy into the ground just to have price stability.” Engineering a soft landing with GDP growth of 9-10% is not the same thing as doing so with it at 3-4%. Perspective, again.
In other words, although official interest rates from Australia to Indonesia have been heading upward for months now, these countries can easily afford to make large, targeted fiscal offsets to tighter credit conditions – in tax policy, infrastructure investment, social programs, etc. For instance, although market observers have been abuzz about China’s moves to tighten lending standards, China is looking to build 36 million low-income housing units over the next five years, while also committing over $100 billion to a universal health care system by the end of 2012. While the U.S. Congress dithers over whether to raise our already-unsustainable debt load, these countries are investing into their people and economies. The difference couldn’t be starker.
Will higher interest rates in Asia put some pressure on growth? Of course, as they would in any economy. Will they derail what is going in Asia from a long-term perspective? In our view, not a chance. A quick check reveals that emerging market interest rates are not even halfway back to pre-crisis (2008) levels, leaving a lot of room for monetary policy to work long before the alarm bells should sound. And a little often goes a long way when it comes to interest rate hikes – early data in China suggests inflation pressures there may already be receding.
So the next time you read the words of some fretful economist or analyst bemoaning the imminent decline of the Chinese economic engine, do so with a grain of salt and a healthy dose of perspective. Like any trend, the growth of Asian economies will be neither at a constant pace nor in a straight line. But it will most assuredly continue.
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