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China Sharpens Focus on Growth as U.S. Stumbles
This week, hard on the heels of the U.S. Treasury bailout of Fannie Mae and Freddie Mac came the bankruptcy of Lehman Brothers, Merrill Lynch’s sale and the Federal Reserve’s rescue of AIG. Investors pummeled the shares of Morgan Stanley and Goldman Sachs on Wednesday, and the financial crisis impacted every market, with precipitous falls in Europe and Asia. The sense of gloom that had surrounded equity markets erupted into panic and capitulation. The response of the U.S. authorities has been to jump in whenever they see an imminent threat to the soundness of the financial system. The Federal Reserve again intervened to support the financial system and this week, they were joined by the central banks in Europe and Asia. The U.S. faces an uphill struggle, with a severely weakened financial system, battered consumer confidence, and a political process that is stymied by the partisanship of a presidential election campaign. Europe faces strong headwinds too, with her own economic and housing problems. These headwinds suggest that central banks may not prevent recession in the short term, but should be successful in stabilizing their economies over a one- to two-year horizon. Nevertheless, this means that Western economies will probably chug along slowly, rather than surge ahead. The hope for faster global economic growth depends not so much on New York, London and Frankfurt. A large part of the solution is to be found in Beijing. Swift Action Just hours after news of the latest shocks to rattle Wall Street this week, China's central bank announced it would cut interest rates for the first time in more than six years, a move that displayed swift and decisive action toward supporting growth. For more than a year, Chinese authorities have been focused on battling rising inflation, but the rate cut indicates to many the beginning of a series of monetary easing and fiscal stimulus policies. In addition, media reports claimed that China Investment Corp., China’s sovereign wealth fund, was holding talks to increase its stake in Morgan Stanley. With its huge cash reserves, China is now stepping in not only to reignite domestic growth but also to stabilize the U.S. economy. It didn’t used to be this way—China used to be seen as just an “offshoot” of U.S. monetary policy, with a fixed currency, weak domestic consumption, a socialist economy and a thin band of coastal Special Economic Zones supplying goods to the West. Much has changed. No country of such size has increased its role in the international trading system as quickly as China has since the 1980s. China has also attracted huge foreign direct investment and complied with World Trade Organization rules to open up its financial sector. And now, China has shown that it potentially at least has the ability to bail out some of the biggest names in U.S. finance. Stimulating Demand The looser policy comes not a moment too soon. China’s car sales and property sales plunged in August, industrial output is growing at its slowest pace in six years and its domestic equity market has more than halved this year. However, inflation is subsiding. This gives policy makers more room to stimulate growth. Confidence is steady and credit growth already accelerating. Asian banks must be looking at their own economies with renewed enthusiasm for investment at home. They remain well-capitalized with relatively few loans outstanding compared to their vast deposit bases. And although the interest rate cuts mean they will earn less money on their loans, they may be able to write more of them. So, even though U.S. monetary authorities may find themselves “pushing on a string,” China’s central bank should be able to stimulate the pent up demand for mortgages, auto loans, consumer debt, and funding for infrastructure projects and corporate capital expenditure that has been hibernating since credit was tightened last year. Worries over growth will remain and there is no way of knowing how far profits might fall from their cyclical highs. Nevertheless, by stepping back and taking a longer-term view, easier monetary policy should have a far greater impact on growth in Asia’s fundamentally relatively healthy economies than it will the sickly economies of the U.S. and Europe. Robert J. Horrocks, PhD *As of August 31, 2008, the Matthews Asia Funds held no positions in any of the companies mentioned.
Single country and sector funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific sector or geographic region. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information. |
