Perhaps most attention will be focused on China, given its influence on global trade and on commodity prices. In China, the impact of previous tightening of bank lending is feeding through, slowing the economy.
One can draw an analogy between controlling China’s economy and turning the shower knob in a hotel. It is unlikely you will get the temperature exactly right the first time. Turn the knob too much in one direction and the water turns too hot, turn it the other way and it gets too cold. Eventually you get it just right.
Similarly, with Chinese policy. Eighteen months ago, the Chinese central bank eased monetary policy by relaxing lending controls. Bank lending almost doubled to just under 10 trillion yuan (US$1.48 trillion) last year. At the start of this year, the authorities tried to cool things, slashing the lending target to 7.5 trillion yuan for this year and imposing other restrictions.
These measures are taking effect and thus we should not be surprised by news of a slowdown in China. Yet, policymakers may soon decide that they have gone too far in cooling and by the year-end, they may try and warm things up, giving the economy a boost as it enters next year. The bottom line is that China, like the rest of Asia, is an economy with different challenges — those of success.
Add in the recent move by the Chinese to let their currency appreciate — albeit gradually — and the immediate outlook may well be one of Asian currency appreciation. It may also not be too long before the worries of only a few months ago — namely how to control capital inflows — return to centerstage.
There is a need to see through the present market uncertainty, and recognize the signals from recent data and policy actions. We must not underestimate near-term downside risks in the West. While it may be a sub-trend recovery across the globe, emerging economies look set to experience stronger growth rates.
Gerard Lyons is head of global research and chief economist at Standard Chartered Bank.
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