CHINA: Asia Economies - China - With a sound economy the government is playing the long game.

CHINA: Asia Economies - China - With a sound economy the government is playing the long game. - Before the Asia crisis, the Chinese economy was growing by 9%-10% a year. In the wake of it, China is likely to grow by 7% this year, with a similar rate of g

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Last Updated: 31 Aug 2010

Before the Asia crisis, the Chinese economy was growing by 9%-10% a year. In the wake of it, China is likely to grow by 7% this year, with a similar rate of growth next year. It is incorrect to say, therefore, that China has been unaffected by the problems afflicting other countries in the region. The loss of intra-Asian trade, resulting from stagnant demand elsewhere, is significant. There are also real worries that, were China to hit serious problems, the kind of difficulties experienced elsewhere would quickly come to the fore.

It's true to say, however, that the impact on China looks to be relatively small. Rising domestic demand, in what is, after all, an enormous home market, is important, as is the role of exports to the still-growing US and European markets.

Another factor concerns the nature of private capital flows to China.

With a higher proportion of overseas private capital in the form of long-term flows, and in particular direct investment, the scope for a sudden reversal has been far less than in smaller Asian economies, where funds have flowed in and out of local stock markets and currencies at breakneck speed. In addition, China has a relatively small proportion of foreign debt to GDP.

In the wake of the crisis, attention has focused on the Chinese currency, the renminbi yuan. Since the beginning of 1994, when China devalued its currency by 48% relative to the dollar, the People's Bank of China has controlled the renminbi within a very tight range. This effective dollar peg has been one of the pivotal signals during the crisis. If China devalued, the argument has been, then not only would Hong Kong's hard-fought dollar peg also be an inevitable casualty, but a new wave of devaluations across the region would begin.

In China, the preservation of the effective dollar peg has been made easier because the fundamentals of the economy appear sound and because of the nature of capital flows.

The Chinese government is playing the long game. Not only would a reckless capitulation to powerful financial market forces be seen as a dereliction of China's duty as a global economic player, but it would almost certainly force a protectionist backlash from Washington, given China's large and growing trade surplus with the US.

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