Meanwhile, increasing trade with emerging markets has been a "godsend" for China, Xie says, noting that China's exports to the West are already winding down. He predicts a 10% to 15% growth rate in these exports over the next year compared to a growth rate of more than 20% in recent years. This trend is partly due to market saturation, he says, and partly due to the loss of some cost advantage to countries like Vietnam and Bangladesh.
Emerging market trade, by contrast, already accounts for half of China's trade growth, says Xie. These economies export precisely what China needs -- commodities such as oil, copper and iron ore. In return, they buy cheap Chinese-made consumer products and capital goods. "In the short term, this is going to be a huge cushion for China," says Xie. "Next year, exports will continue to grow."
For Xie, this blossoming South-South trade represents "the dawn of emerging market development." He predicts that the large foreign exchange reserves in places such as India, Russia, Dubai and even Africa will have "very important implications for what happens next year," because these economies will continue to be able to spend despite the U.S. recession.
Scott Chu, Pioneer Funds' China representative, paints a similar picture. "I don't think that the downturn in the U.S. will have any impact on China," Chu says. "China has shaken off its dependence on the growth of the U.S. economy. Consider the recent number of exports. In the third quarter of 2007, the U.S. economy slowed down while China still has robust growth in its exports, which grew faster than the exports of any other country. And if you look further, the fast growth destinations are the Middle East, Africa, Vietnam and Indonesia. China's exports will gradually relocate to the euro area, Middle East and South East Asia."
How much will the yuan's appreciation impact China's exporting? Not much, and the impact is positive, suggests Chu. "When the yuan gradually appreciates, those low-margin, labor-intensive, heavily polluted and low-value-added industries will be forced out of China, and enterprises will start upgrading themselves into high-value-added businesses while also trying to improve their efficiency. That's why in recent months, you see that China's trade surplus number is actually going up instead of going down."
Chu also sees "real estate consumption -- the biggest item for the Chinese and one that is driving all the related spending, including house renovation, electronics, furniture and life-style spending -- going up steadily. In short, China's consumption, exports and investments are all healthy, which suggests a 10% or above growth for 2008."
Adds Xie: "My hunch is that next year is okay," but he cautions that it would be an altogether different story if the U.S. falls into a deep recession, with 2% or 3% negative growth for the year."
A Bubble That Will Get Bigger
The upbeat export picture is not the only factor likely to bolster China's performance next year. "I believe the hot money story is going to become bigger next year," says Xie. Following the subprime crisis, money that would have flowed to the U.S. will instead come to China, he predicts. "Wall Street financiers, including my ex-colleagues, are leaving their jobs without waiting for their non-existent year-end bonuses, arming themselves with funds and taking aim at China. My phone has been busy. So the asset bubble you are seeing here is probably going to become bigger" next year.
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