There’s a reason why Olympic sprinters only run short distances. It’s because a sprinter can only run so hard for so long. It seems the same holds true for China’s economy.
Yesterday, Premier Wen Jiabao blindsided the markets as he announced that China is downgrading its 2012 growth target from 8.0% to 7.5%, its lowest since 2004. In doing so, he signaled that China’s period of extremely strong expansion, which saw its economy grow 9.2% last year, may finally be coming to an end.
What China has been able to accomplish in recent years has been nothing short of remarkable. Over the past decade, it has consistently managed to post annual growth above 8.0%. But to do so in this current environment would be asking too much, even from China.
After all, even if it’s now the world’s 2nd largest economy and has been among the fastest-growing economies in recent years, China is not immune to the problems that plague the global economy. Think about it, why else would it go through its recent bout of monetary policy easing?
Premier Wen Jiabao himself cited the grim outlook for the world economy and high inflation as major threats to growth and the main reasons behind the decision to lower China’s growth forecast. Some may take this as a sign of pessimism, but I think it’s simply a matter of being realistic. It’s difficult to sustain such a strong pace of growth in times like these.
At the end of the day, all China wants to achieve is sustainable growth, and it plans on making major shifts in its fundamentals to do so. Its leaders want to cut reliance on exports and investment while boosting consumer spending, but doing so entails a transition period that may see growth taper down in the near term.
Since the predicted slowdown in China, there has been an obvious shift in risk sentiment. Safe haven currencies such as the U.S. dollar and Japanese yen have staged strong rallies while equities and commodity-based dollars have sold-off heavily.
To illustrate, take a look at NZD/USD price action yesterday. Due to New Zealand’s close trading ties with China, the pair moved significantly lower and closed the day with a 99-pip loss. The same bearish price action also happened in AUD/USD, albeit less severe.
I believe this new development is the sort of thing that can have a lasting effect on the comdolls. Not only is China’s growth outlook negatively affected, but so are the economies of its major trading partners. For instance, oil exports in Middle Eastern nations and Australia’s robust mining industry could receive a huge blow as China scales down on imports.
Given all these, it makes me wonder what’s next for the comdolls. Is this the catalyst that will put an end to the comdolls’ recent rally? Or is this simply a small bump in the road that they will eventually overcome? Feel free to leave a comment below and tell me what you think!