China aims for an Olympic encore with economy

What happens in Asia's emerging markets is of direct consequence to the Gulf, because Asia is the UAE's biggest customer for oil.

Far from the Olympic hoopla in Beijing lies the sprawling port of Yantian, on China's southeast coast. Once a tiny fishing village, Yantian has since 1994 been transformed into the booming country's second-largest deepwater container port - the fourth-largest in the world. The containers of Chinese exports flowing out of Yantian rose at a double-digit pace year after year after year, as the factories of Shenzhen pumped merchandise to feed the seemingly bottomless appetite of the American consumer.

Until now, that is. For the first time since it was opened, Yantian port is experiencing declining business as fewer and fewer cargoes arrive bound for the US west coast. The American housing slump and economic slowdown are finally coming home to roost in Asia and other export-driven developing nations, economists say. "Evidence of decelerating demand in emerging markets is rising," said Donald Hanna, the head of emerging markets research at Citigroup in New York. "The rest of the world is now slowing."

From Tokyo to Singapore, economic growth appears to be cooling thanks to slower demand for exports, a development that has been contributing to a slump in prices for raw materials such as oil and helping to fuel a recovery by the US dollar and bonds. In some ways, the victory of recession over inflation was good news for central bankers and investors. The stagflationary scenario that has unfolded this year has been destroying capital indiscriminately, leaving hard commodities the only seemingly safe place to preserve wealth. With inflation in check and central banks able to start lowering interest rates, investors could conceivably return to fixed-income securities and wait out the slump. Gone would be the nauseating combination of tighter credit and soaring inflation and in its place would be the gloomy but familiar problem of how to invest in a downturn.

The latest speculation that the US government may yet have to buy out Fannie Mae and Freddie Mac, America's two largest home-loan buyers, has helped to puncture the newfound faith in dollar-denominated assets. And at the other end of the world, Asia's gathering slowdown is also prompting predictions that the slump in commodity price inflation may be about to end. China's government, many analysts say, is set to follow the Olympics with its own display of strength, speed and agility: trying to hasten the pace of the country's economic engine to avoid a slowdown.

While they differ widely on just how China may or should accomplish this feat, whether by buying dollars to weaken its currency or by simply pulling out the stops on lending and spending, analysts and economists across Asia agree that such an attempt is in store. What's more, they say, China's emerging market alter-ego, India, is also likely to implement similar forms of economic stimulus to keep its citizens happy, too.

What happens in Asia's emerging markets is of direct consequence to the UAE and the Gulf, not just because the UAE is also an emerging market, but because Asia is the UAE's biggest customer for oil and its demand has direct bearing on oil prices. Perhaps more significantly, Asia represents the biggest potential market for the UAE's value-added products and manufacturers as it diversifies its economy away from oil.

Asia's slowdown is nothing like that in the West. Economists predict that growth will remain strong, with Citigroup projecting that growth will fall this year and next to just 7.5 per cent, from 8.5 per cent last year. China's own growth rate is forecast to decline to 9.7 per cent next year from 11.9 per cent last year; India's to 7.9 per cent from nine per cent. But slower growth rates in Asia, economists warn, can feel like a recession, particularly if inflation remains high and growth fails to absorb the millions of young people flooding into cities every year looking for jobs.

This rapid urbanisation is a source of great strength in Asia's economies, fuelling the growth of a middle class that requires massive infrastructure spending, residential and commercial construction and myriad new services. Despite predictions that this internally driven growth could insulate Asia from external shocks, however, much of the money that pays for it still comes from exports to the developed world. "We don't have domestic demand strength in Asia," said Venkatraman Anantha-Nageswaran, the head of research at Julius Baer private bank in Singapore.

When the credit crunch hit a year ago, therefore, money became tighter in Asia despite the vast reserves held by central banks and the high rate of savings among Asian workers. "It suddenly became very difficult to issue bonds or equity," said Edward Teather, an economist at UBS in Singapore. "Capital became a lot more difficult to get hold of." Rising inflation, abetted by currencies that Asian governments keep artificially low to maintain export competitiveness, eroded the benefits of economic growth and rising wages. Inflation in China is now above seven per cent, while in India it is nearer to eight per cent. Vietnam, which has been running massive current account deficits to help finance its own boom, has seen inflation rise to above 25 per cent.

The slowdown in US export demand has turned out to be much more severe than most economists anticipated. "China's export sector into a deep winter," wrote Andy Xie, a Shanghai-based economist, in a recent editorial for China's leading business magazine, Caijing. "Its impact on economic growth should be considerable." With economic growth now posing a greater threat than inflation, some analysts say, China is likely to opt for economic stimulus, even at the risk of rekindling price increases. China can draw on its own fiscal surpluses, they say, to soften inflation's impact, much as Abu Dhabi has doled out petrodollars to soften the blow here.

And with demand for exports soft, some say China is less likely to push the value of its currency down. Instead, it is likely to let the renminbi appreciate to reduce import costs, while lifting industrial restrictions designed to cut pollution during the Olympics that Goldman Sachs estimated recently affects 26 per cent of China's economic output. Oil analysts at the International Energy Agency, and here in Abu Dhabi, predict that that will revive demand for fuel, pushing oil prices back up.

Combined with another US$500 billion (Dh1.83 trillion) of infrastructure projects due for completion by 2010, according to Threadneedle Asset Management's China fund manager, Gigi Chan, and China's economy and its demand for commodities could be set to grow Citius, Altius, Fortius.
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