China and Japan Post Deteriorating Growth

Two stories on Bloomberg discussed how the world’s export powerhouses, China and Japan, are feeling the effects of the global slowdown.

First on China, which seems inclined to weaken the yuan to defend growth. That’s a mixed blessing for the US. A stronger dollar hurts the export sector, the one sunny area of the economy, but means the Chinese will need to keep buying dollar assets to keep the yuan down.

China’s industrial production grew at the slowest pace in six years on weaker export demand, power shortages and factory shutdowns during the Olympic Games.

Production rose 12.8 percent in August from a year earlier, the statistics bureau said today, after gaining 14.7 percent in July. That was less than the 14.5 percent median estimate of 22 economists surveyed by Bloomberg News…

“Growth concerns and moderating inflation will make the authorities more likely to cut reserve requirements and slow yuan appreciation,” said Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong. She estimates the reserve ratio will fall 50 basis points from a record 17.5 percent by year’s end, dropping to 15 percent in 2009.

Of the yuan’s 6.7 percent gain this year against the dollar, only 0.1 percent has come this quarter, after policy makers shifted in July to placing extra emphasis on sustaining growth rather than cooling inflation. A stronger currency hurts exporters by pushing up the prices of their products….

As many as 67,000 medium-sized and small companies posted losses in the five months through May, according to the National Development and Reform Commission. In Guangdong province, an export hub, the number of toymakers fell more than 70 percent in the first seven months from a year earlier, as more than 3,600 shut down, the official Xinhua News Agency reported.

Policy makers have already loosened loan quotas — restrictions on how much banks can lend — and raised export-tax rebates for garments and textiles.

Extra infrastructure spending is another possible tool for stimulating economic growth to prevent a slump.

And on Japan:

Japan’s economy contracted more than the government initially estimated last quarter after figures showed businesses cut spending…

Bank of Japan Governor Masaaki Shirakawa said last week growth in the world’s second-largest economy is likely to “remain sluggish for the time being.” With little room for interest-rate cuts or government stimulus, Economic and Fiscal Policy Minister Kaoru Yosano said there’s “nothing to be done but wait” for the country’s export markets to recover.

“Japan’s economy will keep slowing at least until the end of this year,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group in Tokyo. “Compared with previous recessions, this one will be very shallow. We’re at the deepest point of the downturn now.”…

Stalled growth and the fastest inflation in a decade have created a dilemma for the Bank of Japan, which will probably have to keep interest rates unchanged for the rest of the year, according to economists surveyed this week. At 0.5 percent, Japan’s key rate is the lowest among major economies…

Slumping U.S. demand has forced exporters including Toyota Motor Corp. to cut production and jobs. A Kyushu-based Toyota subsidiary reduced output of sport-utility vehicles by at least 10 percent and fired 800 workers since June.

Markets outside the U.S. are also deteriorating. The European economy shrank for the first time in almost a decade last quarter, and EU Commissioner Joaquin Almunia said this week that the outlook is “unusually uncertain.”…

Even as exports weaken, economists say companies are better able to withstand the slowdown because they have shed the excess workers, factory lines and debt that contributed to a decade of economic stagnation in the 1990s.

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  1. David Pearson


    Its not clear whether a weaker Yuan would result in more dollar recycling.

    Dollar flows to China are comprised of the trade surplus, FDI, interest-rate driven carry trade, and speculation on a Yuan reval. Brad Setser has highlighted the recent importance of “hot money” flows. These are presumably driven by the carry trade and reval speculation.

    With the new weak Yuan policy, the reval possibility is out the window. That leaves the rate-driven carry trade, which is now suffering from widespread hedge fund de-levering.

    As for the trade surplus, one could argue its more a function of American consumption than the level of the Yuan. As such, its probably on the decline.

    Finally, there’s talk in China of a stimulus program. Pumping up domestic demand is one sure fire way of reducing the trade surplus.

    Emerging market current account surpluses appear to have reversed course and are now falling or poised to fall at the same time that the U.S. needs external financing for rising budget deficits. Maybe this will be the final straw that breaks the Bretton Woods II camel.

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