China Economy: Effects of the US Financial Crisis in China

Beijing, 1 Oct. Read Part 1 here.

Beijing, 1 Oct. Read Part 1 here.

Part 2: China and the rest of Asia have fared remarkably well despite Monday’s Dow plummet of 777 points. Although yesterday before the markets had closed we reported that the impact on India was considerable, the Indian markets closed with gains.

Bargain hunting in much of Asia, including Hong Kong and China, lifted markets there. With Hong Kong’s currency pegged to the dollar, they are especially susceptible to US economic fluctuations.

Not surprisingly, Chinese officials want to see a restoration in the market. “Rescuing Wall Street is urgent in order to protect the American economy, but at the same time as rescuing it, regulation of Wall Street needs to be strengthened,” China’s Xinhua news agency reported. It did not specify on what action should be taken.

No specific message has come from Beijing yet on China’s stance of the bill and its failure. These comments are as close to an official government statement that has been made so far. When China ends its National Day holidays a statement is expected.

Last week Premier Wen Jiabao expressed his concern and wanted to work to help calm markets.

Because China exports so much to the US, China holds huge amounts of US dollars. Naturally, the country is concerned for its capital. But more significant is that US buyers from China need to have liquidity and funds in order to keep fueling the Chinese economy and its massive exports.

Depending on the strength of the dollar, it’s a scary prospect for Chinese manufactures that a weak dollar will mean a decline in exports.

China also knows that its high beta – or relative volatility – means it is sensitive and very susceptible to shocks like those being experienced in the US today. This is true for all emerging markets.

In 2008, growth has dropped from more than 12 per cent last year to an expected 9 per cent or so this year.

Just a week ago Hong Kong, depositors queued up in front of the Bank of East Asia to pull their cash out. Bank runs like this are not healthy for anybody and can threaten stability and confidence in a major way. Nevertheless, the Hang Seng index closed up 0.53% Monday night.

But such a run on banks in China is not likely as Chinese have limited places to keep their savings. Furthermore, their banking institutions are some of the world’s strongest. China’s treasury had a US $130 billion surplus in the first half of 2008.

In other news, the recent milk poisoning from China has led to some adverse effects. Cadbury, Heinz, and Lipton have all been spooked by the scare, and have stopped buying milk products from China.

But that didn’t taint Diageo’s perception of the nation: “China looks particularly resilient … Our overall view is that it is probably the most stable market in Asia,” John Pollaers, President of Diageo’s Asia Pacific region, reported on Tuesday.

On Monday 29 September, Warren Buffet’s Pacific Corporation announced its 10% buy of Chinese electric car maker, BYD Co. Ltd.

Chen Xiulian, EconomyWatch.com