August 20, 2008 - Here's what BCA Research says about China - Growth moderation in the Chinese economy will continue. However, unlike many previous Olympic-hosting countries, the end of the game-related construction will have little tangible impact.
While the growth moderation in China will persist, it will be gradual with limited downside. Olympics-related capital spending (although estimated at a record US$43 billion) is only a fraction of China's total capital spending and a relatively small portion of its US$3.6 trillion economy. In addition, the Chinese authorities are being proactive and have already shifted their focus to protecting growth, even though signs of the slowdown are still very preliminary and headline inflation remains above their target. So far, domestic demand is holding up well: retail sales volumes continue to accelerate and the softening in food inflation over the past several months is helping to alleviate a meaningful drag for lower-income households. Although it is still too early to expect a rebound in China's export sector (the weakest link in the economy), the slowdown may already be well advanced. Moreover, the Chinese government has started to increase its tax rebates to exporters of some low-value-added industries, which should help stabilize their overseas sales. Additional fiscal support is expected if excessive weakness in these sectors persists. Bottom line: We expect a further moderation in China's economic growth but maintain a positive outlook. The two primary risks that we are monitoring are the ongoing shortage of electricity and the rebound in the U.S. dollar.