"As a result of the global slowdown, I would expect China's trade surplus to slow a little bit, but not drastically.
The really important point about China's trade is that China's exports are growing substantially faster than the growth of the exports of any other country in Asia and the trade surplus is widening a lot more. So China is clearly gaining ground and that could be simply due to reallocation of labour and its own competitiveness, but it could also be an aspect of the undervaluation of the currency.
"I believe that China's trade surplus is likely to continue to be very strong, and China will make ground against other Asian currencies as long as they've been appreciating their currencies more rapidly than China; China has been keeping its currency down. Of course it's appreciated, but only relative to the US dollar.
"To a degree this will offset the impact of weakening demand in the developed world for Chinese goods, but I would expect China's trade growth to slow to the high teens, but not down into single digit growth and for domestic growth in China to continue to be very vigorous.
"It's true that the Chinese have been attempting to slow domestic demand, but they've been doing that mainly through quantitative measures, attempting to impose credit controls and using the reserve requirements. What they haven't really done is to raise interest rates sufficiently to limit the amount of credit, and what we're seeing is the emergence of a leakage of credit outside the official banking system into markets where people can get genuinely good market interest rates. If the official sector interest rates are restricted you tend to get this leakage and growth of credit outside the system, so the official numbers no longer tell you what the total rate of growth and credit is and that means that China may have to continue on its squeeze programme for longer.
"China's method of squeezing is only going to have an effect after a two year period, so the inflation rate we're seeing today is the result of the very rapid money and credit growth that we saw two years' ago. What they do now will affect inflation over the next couple of years, and at the moment I would say that they're not really squeezing hard enough to bring it down significantly. So I would expect Chinese inflation to peak out, roughly now or over the next few months, but not to come down significantly. I think that they will fail to get the inflation rate back down to two or three percent. I think it will stay in the four to six percent range unless they tighten more."
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