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ANALYSIS

Economists warn of potential post-Olympic China downturn

Ann/ The Korea Herald
Morgan Stanley's prominent economist Stephen Roach once said that when today's Chinese economy sneezes, Asia and possibly even the rest of the world could catch a cold.
Many market watchers sharing his view sense signs of jitters in the Chinese financial markets, and they advise Korean investors to get prepared for fallout from China's post-Olympics economic hangover.
The Shanghai Composite Index, China's key stock index, is expected to undergo wide fluctuations after tumbling to a 19-month low Monday (Aug 11), as mounting inflationary pressure was feared to inhibit the country's growth in the near future.
Park So-yeon, a market analyst at Korea Investment Securities Co, said anxiety about a post-Olympics economic downturn may be overblown.
"It would be naive to put too much weight on a sports event to assess the outlook of a 3 trillion won-economy," she said.
Inflation in China will prove more critical in deciding the
future direction of the Chinese economy as well as the global economy, he said.
"We have seen the role of China changing to an inflation exporter from a global deflation exporter," Park said.
Still, the latest consumer prices and other macroeconomic data suggest that China may not be able to play a role as a buffer against the US-led global economic downturn as many expected, analysts said. China has a profound effect on the direction of business cycles of Korea and other Asian emerging markets.
"The belief that China could partly help reduce the magnitude of the global economic slowdown does not seem to be valid any longer," she said.
"Until now, economic distress in China stemmed from external fronts. The fear is that many people now seem to believe that the economic problems lie in the Chinese economy itself," said Stephen Lee, an analyst at Samsung Securities Co. China's Consumer Price Index in July rose 6.3 per cent from a year earlier, according to the latest data.
The pace of the price increases appears to be modest, but the price level itself is
too high for the Chinese government to loosen its grip on price control and embrace an economic stimulus policy, he added.
The confidence in the fundamentals of the Chinese economy seems to have been destroyed, weighing on investment mood in Asian equity markets and adding concerns about economic downside risk, he said.
Economists note the "China factor" has become more influential on Korea's economy and its financial markets. China makes up 22 per cent of Korea’s total exports, almost double overseas shipments to the United States. Slowing demand in China would immediately affect corporate investment and employment levels in Korea.
China-related investment funds in Korea reached 22.78 trillion won ($22 billion) as of Aug 8, a large increase from 9.7 trillion won ($9.4 billion) a year ago, according to the Asset Management Association of Korea.
A monthly average of 1.8 trillion won ($1.8 billion) capital inflow into the funds reflects the frenzy of China investments among Korea's
retail investors In October alone, 5.5 trillion won ($5.3 billion) was poured into a variety of China funds.
"A sudden outflow of hot money from Chinese capital
markets would be detrimental to the Chinese economy and have far-reaching repercussions for Korean markets closely linked to China," said Moon Jung-hiu, economist at
Daishin Securities Co. His rough estimation of hot money in China is $128.6 billion, nearly a half of the foreign reserves held by tire country in the first half of this year.