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Economics has more in common with physics than you might imagine, since the statement “what goes up, must come down” applies equally to both disciplines.
The accepted wisdom is that when markets have rallied significantly over a period of time, the chances are higher that they will fall than rise, the question is just how quickly that might happen.
China is the one economy that is raising these concerns at present, since it has grown so impressively in the last decade that it has already overtaken Japan as the world’s second largest economy. The IMF expects it to beat the US to become the world’s largest economy by 2016. Some feat, if it succeeds.
The Hang Seng Index has been volatile to say the least during the credit crisis. In October 2007, the Hang Seng had reached the heady heights of 31,352.58. But by March 2009, it reached a low of 11,921.52 – a loss of more than 60% of its value.
However, in the past year, its recovery has been almost as dramatic – on June 7, 2010 the index stood at 19,378.15 and it had risen to 24,876.82 by November 5, and has fallen back to 22,949.56 at the time of writing.
China’s spending power has boosted other Asian economies, which are intrinsically linked with the performance of the world’s latest economic superpower. Australia particularly has benefited, as the conspicuous consumption of resources in China as it has improved its infrastructure during its period of growth has required greater imports of coal, iron ore, copper and zinc, among other minerals and aggregates that Australia exports to China.
Yet the latest five-year plan approved by China’s National People’s Congress has factored in a growth rate of 7% a year, and lays out methods to change the focus to consumer consumption in the country. This could lead to less concentration on infrastructure development in the long-term, but it is unlikely to have much impact on its use of natural resources in the short-term.
China’s current growth rate is 9% a year, and although experts such as John Greenwood, global economist at Invesco expect this to slow, it is not thought that it will slow significantly. A greater rate of consumption by the Chinese people as their wages rise – Goldman Sachs is predicting the number of people earning US$30,000 year in China will exceed the number earning that figure in the US by the late 2020s – will lead to greater imports of high-end luxury goods such as champagne, cars and handbags.
Any contraction in the Chinese economy would reduce the available investment for Asian economies, reducing their ability to export to China, and affecting jobs and wages as a result.
As yet, any fall in China is expected to be ‘soft’, which would have far less impact on Asian economies as a whole. To be frank, if there is a sharper than expected slowdown in the Chinese economy, it could cause series problems for the world economy, according to the Organisation for Economic Co-operation and Development (OECD). Let’s hope the experts are right.
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