COMMENTARY
Commentary: Decoupled or Derailed?
January 24, 2008
Christopher Bjorke, AFP

China and emerging Asia may feel fallout from U.S. troubles, but won't be brought down

Anxiety about markets ramped up a notch in the past week, with emergency interest rate cuts by the Fed, unusually swift bipartisan moves in Washington toward a stimulus package, and the "R word" on everyone's lips.

If the troubles in American markets were not enough of a worry, the global plunge that occurred Jan. 21 prompted the question of whether a worldwide contagion is looming. The possibility of an Asian downturn is especially disheartening, since developing markets, which are in theory now decoupled from the U.S., have been seen as the only bright spot in a period of slow growth.

According to observers, China and other emerging Asian countries will likely stumble some, but not succumb completely to America's downturn.

Decoupled, but connected

The Economist this week said that decoupling-the concept that the rest of the world no longer followed the economic trends of the United States-was a misnomer, but not a myth.

"In fact exports and hence profits would certainly be reduced. The pertinent argument is that they would be hurt ... much less than in previous American downturns," it stated. The degree to which countries will be affected depends on how much they export to the States; more so for economies like Singapore and Hong Kong, but not so much for China, which sends the equivalent of 8% of its GDP to the U.S.

China's exposure to U.S. credit problems has also been an issue of concern for Beijing. The Financial Times reported this week that the China Banking Regulatory Commission is creating a task force to determine how much the Bank of China and other banks hold in U.S. subprime mortgages. Here, too, China is expected to emerge relatively unharmed, as Chinese financial institutions are believed to be less invested in bad credit holdings than banks in Western countries.

On the other hand, decoupling does not necessarily mean disconnection.

"I think that one of the things about our modern financial world is that traders are almost alike everywhere. We saw big declines in China. They don't have a subprime lending system there. We saw around the world, in every market, that it's very correlated now," said Jeremy Siegel, professor of finance at the Wharton School, in an interview with the school's newsletter. "Everyone is on the phone with everyone else, everyone is emailing everyone else instantly and so any fears or anxieties spread like wildfire, including rumors that are both true and false."

Markets in China have fallen off since their peak in October, a correction from a run-up on prices, according to Milken Institute Senior Fellow James Barth. However the outcome of the U.S. downturn is still a relevant question in China.

"Obviously the big concern now probably would be what happens in the U.S. economy, whether or not we are in a recession or headed to a recession and if so, how severe it might be and to what extent could it reverberate in other countries like China," that trade heavily with the United States, he said.

China and emerging Asia's growing economic prominence means that they will not necessarily be dragged down in the wake of the U.S. downturn, but a more globalized planet means that they are still strongly connected to the world's largest economy.

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