There are also increased fears over the Chinese economy. China will be
damaged by any general downturn in global activity as there will
inevitably be an important impact on exports. The Chinese authorities
are also facing an increasingly fraught monetary-policy situation,
especially with inflation above 6%. Interest rates need to rise
further to stem inflation, but further tightening could help plunge
the housing sector into a deep downturn.
In this context, the Euro warnings and the recent criticism of US
policies should be seen as an instrument to warn the Chinese people
that China’s recent pace of advance is not sustainable. It is much
easier to blame overseas policy weakness for any downturn and hope to
deflect criticism of China’s own economic policies.
China also faces a very important decision on the exchange rate,
especially as there will be contrasting effects on the domestic
economy. A weaker Euro would tend to undermine China’s export
prospects as China would lose competitiveness. On the other hand, a
weaker Euro would also make luxury Western goods less expensive. With
social tensions increasing and basic food-costs rising sharply, The
Chinese leadership’s immediate priorities are likely to be at the
lower end of the income scale and this would suggest they will look to
keep the yuan relatively weak and support the export sector.
In the short term, the most likely outcome is that China will continue
its efforts to support the Euro, but they will be getting increasingly
nervous that the financial-sector difficulties are now so severe that
the Euro will not be salvageable even if they do exert further
political pressure on European leaders.
http://www.investica.co.uk/marketreport22-08-11.htm
