CHINA’S GDP THREATENED BY US SAVERS
BORIS SCHLOSSBERG
DIRECTOR OF CURRENCY RESEARCH, GFT
LAST week China released its GDP figures for the second quarter of 2009. While it missed the vaunted 8 per cent target, the country’s economy did expand at an impressive rate of 7.9 per cent.
Compared with the miserable results from the G3 universe (US GDP -2 per cent, Eurozone -5 per cent and Japan at -14 per cent), China is the only beacon of strength and growth in a world still grappling with a global recession.
But can Chinese growth maintain its pace into the second half of 2009 and beyond? I have my doubts. China’s second quarter numbers were achieved through a massive government stimulus package. While exports declined by more than 20 per cent, fixed capital investment soared by an incredible 33 per cent.
Furthermore this increase was generated against the 2007 numbers – a time when China was spending furiously on infrastructure to prepare for the Olympics. To put Chinese stimulus spending into perspective, the US government would need to spend $2 trillion in direct investment in order to match the scale of Chinese activity.
While China’s stimulus plan has been crucial in keeping the country’s growth rate on track, the type of investment it has seen over the past six months is simply unsustainable. The country is producing a massive amount of excess capacity and its population is simply not wealthy enough yet to absorb all of that supply.
For the time being, the country remains heavily dependent on exports to generate growth and income. However, consumer demand in the West, and especially in the United States, remains moribund at best. Overburdened with debt, US consumers are saving, not spending. I believe that this trend in the US is secular not cyclical, and will last for many more quarters than most analysts believe, depressing demand for the foreseeable future.
Under those circumstances it is difficult to see how China can maintain its growth by building yet more highways and factories. In the first half of this year, China has been the principal driving force behind the recovery trade. However, if Chinese growth begins to stall as the year heads to a close, then risk currencies such as the pound, euro and Australian dollar could see a sharp retracement off their recent range highs.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read daily commentary on currencies at www.GFTUK.com/commentary or e-mail them at [email protected].