Popping the China question: will the bubble burst or gently deflate?Financial markets are worried about a hard landing in China. Should they be? China's government has tightened credit policy and restricted land supply to cool investment--this is the right policy. Speculative capital poured into China for two years as the Fed cut interest rates to 1%. Ample liquidity triggered an investment boom that exacerbated inflation. The resulting negative real interest rate amplified investment demand and caused a speculative bubble Speculative Bubble A temporary market condition created through excessive buying, and an unfounded run-up in prices occurs. Notes: Speculative bubbles are generally a result of the "bandwagon effect. . China may have invested US$200 billion more than it should; fixed investment may be 20% above trend. This must be brought below trend for a period to absorb the excess. [ILLUSTRATION OMITTED] It is still too early to say whether China will have a soft or hard landing. The measured pace at which the Fed is raising interest rates increases the chances of a soft landing, while the uncontrollable nature of unwinding a speculative property bubble makes a hard landing more likely. In either scenario, the global impact on commodity prices and equipment demand is roughly similar. [ILLUSTRATION OMITTED] Longer term, whether the landing is hard or soft does not make a significant difference. In a soft landing, the economy decelerates to trend after a period of above-trend growth. In a hard landing, the economy decelerates below trend for a period. A hard landing can actually be a good thing, as excess capacity is flushed flush 1 v. flushed, flush·ing, flush·es v.intr. 1. To turn red, as from fever, embarrassment, or strong emotion; blush. 2. out quickly, leading to faster recovery in demand and profit. A soft landing brings less pain short term but may retain excess capacity, causing demand to recover slowly and profit margins to stay low for longer. A slowdown For articles with similar titles, see Slow Down (disambiguation). A slowdown is an industrial action in which employees perform their duties but seek to reduce productivity or efficiency in their performance of these duties. in China affects commodity and equipment industries most. Commodity prices have risen sharply in the past two years on surging domestic demand, and the global equipment sector is booming. Imports to China have doubled since 2001, mainly on demand for commodities and equipment, so economies specializing in these would be most affected as Chinese demand cools. [ILLUSTRATION OMITTED] Global consumers would benefit from a China slowdown. Negative real interest rates helped Chinese businesses pay for commodities, causing prices to rise. Higher prices trimmed consumer purchasing power Purchasing Power 1. The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you'd be able to purchase. 2. around the world. As China's economy softens and commodity prices revert re·vert v. 1. To return to a former condition, practice, subject, or belief. 2. To undergo genetic reversion. to trend, consumer purchasing power everywhere should improve. A government-controlled financial system amplifies China's business cycle. The financial sector does not price risk properly, causing the economy to overshoot o·ver·shoot n. A change from steady state in response to a sudden change in some factor, as in electric potential or polarity when a cell or tissue is stimulated. in both directions. As the financial system is reformed and becomes more market-based, China's economy will become less volatile. Cycles matter. From a low base, the industrialization industrialization Process of converting to a socioeconomic order in which industry is dominant. The changes that took place in Britain during the Industrial Revolution of the late 18th and 19th century led the way for the early industrializing nations of western Europe and of China has had a long history of rapid growth. However, economic cycles will always come and go, and businesses must plan accordingly. The right strategy is to accumulate Accumulate Broker/analyst recommendation that could mean slightly different things depending on the broker/analyst. In general, it means to increase the number of shares of a particular security over the near term, but not to liquidate other parts of the portfolio to buy a security cash at cycle peaks and invest at cycle bottoms. China will become a rich country. You can enjoy its wealth, too, if you are still in business. Andy Xie, Morgan Stanley  To comply with Wikipedia's , the introduction of this article needs a complete rewrite. Economist This is an edited summary from recent reports by Andy Xie, including "Hard or Soft Landing?" dated August 10, 2004, "Global Landing Scenarios" dated June 10, 2004, and "Interest Rate Must Go Up" dated June 28, 2004. For copies of the full articles, including important information and disclosures regarding Morgan Stanley, please see www.morganstanley.com/ourviews or contact 800-962-1343. This article does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or and objectives of persons who receive it. It was based on public information, and Morgan Stanley makes no representation that it is accurate or complete. Estimates of future performance are based on assumptions that may not be realized. Investments and services offered through Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., members SIPC (Simply Interactive PC) An earlier umbrella term from Microsoft and Intel for a PC that works like a home appliance. For example, it has a sealed case, uses external connectors for expansion and boots in just a couple of seconds. . Morgan Stanley and One Client At A Time are service marks of Morgan Stanley. [c] 2004 Morgan Stanley. |
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