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Chinese engine working overtime

Nov 12, 2009

If the data on factory output is anything to go by, looks like China has put the ill effects of the global financial crisis behind it. As reported in a leading business daily, Chinese factory output surged to a 19 month high in October. Having said that, there was a dip in the pace of investment and loan growth as the impact of the gargantuan stimulus package of US$ 585 bn began to wear off. Exports have yet to take off in a significant manner as the US and Europe are still reeling from recession. Despite this, the Chinese economy is expected to log in a decent 8% growth in GDP in 2009. While domestic demand seems to be improving, which is an encouraging sign, it is the excess liquidity sloshing around that is also playing a role in bolstering growth. Readers would do well to recall that government spending and a strong rally in real estate had sparked fears that there was another bubble in the making in China. Infact, Morgan Stanley's Asia economist Andy Xie was certain that the Chinese bubble was set to pop

More importantly, there are concerns that global investors are confusing the Chinese 'stimulated' growth with sustainable growth. It is well known that a large part of the growth in China's economy over the past decade came from exporting and lending to the US. Now with the latter in a deep recession, the former is suffering from overcapacity. Hence, even if China does manage to grow its economy by 8% this year, it remains to be seen whether the same will be sustainable in the next two years.

The dollar finds more supporters
For all the questions raised regarding the status of the dollar as reserve currency, the World Bank has come out in support of it. World Bank chief Robert Zoellick believes that that the dollar's role as a reserve currency is intact. Having said that, the United States cannot take it for granted and needs to tackle its huge fiscal deficit.

The dollar in recent times has come under a lot of pressure. As if the mounting fiscal deficit was not enough, the global financial crisis, which originated in the US, has hit the economy hard thereby weakening the strength of the dollar. Then emerging nations started flaunting their might with China at the forefront saying that they could look to replace their dollar reserves with some other currency.

While there is no doubt that many arguments questioning the dollar's status do appear sound, the fact remains that there is no other currency as of yet which can match the dollar. True, the global financial crisis has hit the American economy badly but its ill effects have afflicted other developed and developing nations as well. For instance, one would be hard pressed to sell the Euro as a reserve currency given that the Euro nations themselves are struggling to keep head above water.

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