Monday, May 03, 2004

What are the global implications of the incipient China slowdown? Stephen Roach sees two big consequences, one for capital goods exporters to China and the other for global commodity markets.

If you've been paying attention to Japan's recent "recovery," you will know that it is built upon external demand -- as usual. Exports both the US and to China have generated the country's biggest current account surplus in history earlier this year. While they're sending consumer electronics to the US, its capital goods to China. Other global engines such as Germany also rely heavily on capital exports, and thus a big China slow-down is likely to cut into both the Japanese recovery and Europe's anemic growth figures. Ditto for Korea and Taiwan.

The second consequence is a cool-down in global commodity markets. As Roach notes,
As growth in Chinese industrial output accelerated from 7% in late 2001 to 19% in early 2004, the Journal of Commerce composite index of spot industrial materials prices went from a deflationary -15% YoY comparison to an inflationary +30% YoY surge.
Roach comes out agreeing with the General. Inflationary fears are misplaced in light of the reins being pulled on the Chinese economy: "If you take away the major demand spark, pricing should follow -- possibly with a vengeance."

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