MEDIA - WSJ: our thoughts on the Chinese economy

We continue to observe a remarkable slowdown in the Chinese economy. This is a consequence of (a) the drop in Exports to a contracting Europe and (b) the incipient cooling off of the local housing market. Historically Fixed Investment/GDP ratios as high as the Chinese one have not boded well for the economy.

In this 2012 election year we expect a very muscular policy response, both fiscal and monetary. The question that many are rightfully asking themselves is how the Chinese slowdown is going to affect the commodity-EM construct.

From the WSJ:

China's dilemma reflects the bind it is in because of a longstanding dependence on exports to generate growth and jobs. Cognizant of the threat to that model from weaker growth in the U.S. and Europe, the government has expressed a commitment to transforming China into a more consumer-led economy. That change, however, implies a stronger yuan with a more laissez-faire approach to exchange rates.

Still, this change is not expected to occur instantaneously, economists say. When Chinese export markets falter, the temptation to play the currency card strengthens.

"China has been growing its economy (real GDP) at an average rate of 10% per year. To fall below 7% is a quasi-recession," said Michael Livian, chief executive officer at investment firm Livian & Co. "It's a very export-driven economy," he said, adding that all signs are pointing to a deepening housing and infrastructure slump, which only makes exports all the more important for China's economy.

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