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Decoupling fans can't be happy. Those clinging to the idea that Asia separated its fortunes from the US have to be sobered by China's latest growth figures. Gross domestic product grew 10.1 per cent in the second quarter from a year earlier, down from 11.9 per cent for all of 2007.
That's still the kind of growth that economies such as the US' can only dream about. Yet global developments may prove dangerous for a nation that needs to create millions of jobs to keep people from protesting on Tiananmen Square. The breakdown of China's GDP data may be a harbinger of a difficult year ahead.
Observers are offering a balanced take on things. "The global slowdown has dented external demand, while faster yuan appreciation, higher wages and rising raw material costs have eroded China's export competitiveness," says Jing Ulrich, JPMorgan Chase & Co's chairwoman of China equities in Hong Kong.
Adds Glenn Maguire, Hong Kong-based chief Asia-Pacific economist at Societe Generale SA: "Slowing economic growth, not rampant inflation, is emerging as the major concern for China's political leaders."
A more serious scenario comes to mind as one connects the dots a bit. Given the overheating risks in Asia's second-biggest economy, more moderate growth is exactly what China wants. Only, the forces chipping away at GDP aren't internal - like higher interest rates and administrative steps - but external.
News that consumer prices rose 7.1 per cent in June, down from 7.7 per cent in May and a 12-year high of 8.7 per cent in February, will be welcomed by officials in Beijing. The relief may be brief, though, when you consider what might unfold in the export markets that drive Chinese growth over the next 12 months.
Trade will provide a smaller contribution to growth, leaving China's expansion to rely heavily on domestic consumption and fixed investment. The latter may cushion things a bit; the former explains why the Chinese government should be watching events in the US with heightening alarm.
US consumers remain a more potent force in Asia than the region's central banks. That can be seen in how Asia has amassed trillions of dollars of foreign-exchange reverses. The buildup keeps currencies from rising versus the US dollar, making export industries more competitive. Demand from US households still means virtually everything in this region.
Trouble is, US consumers are in a pretty bad way. The worst housing recession in 25 years will have an exponentially negative effect on the biggest economy. There's relief that US officials are coming to the rescue. Yet the economic gloom in the US is hard to ignore.
China requires a different set of goals. For a 1.3 billion-person, labor-intensive, developing economy, growth near 7 per cent would be a recession. If financial and housing woes drag down US consumption, as some analysts expect, Chinese officials will be hard-pressed to maintain acceptable growth.
Price increases
Inflation complicates things. While Chinese consumer prices are heading in the right direction, real interest rates are close to negative. With its inflation near the central bank's benchmark lending rate, China will need to be creative to stabilise growth without fuelling price increases.
Concerns about exports are almost certain to slow the yuan's gains against the dollar. While good news for China's exporters, that would leave the economy more vulnerable to the rising costs of energy and food shipped from overseas.
Also, China can't nimbly shift from relying on exports to domestic demand. The millionaires created in recent years as Chinese stocks rallied garnered considerable press attention. Far less focus went to the hundreds of millions living on a few dollars a day. Chinese consumers have great potential, but they are far from ready to replace their US counterparts. And that goes for much of Asia.
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