Slower Chinese growth poses uncertainty-fund managers

NEW YORK Tue Apr 23, 2013 4:46pm EDT

NEW YORK (Reuters) - Fears of a Chinese economic hard-landing have eased but recent disappointing data underscored risks of slower-than-expected growth in the world's second largest economy, fund managers said at the Reuters FX Summit.

A slowdown in China, combined with a deteriorating outlook for the euro zone economy and government belt-tightening in the United States could prompt investors to flee riskier investments and seek safety in the dollar and yen, they said.

Growth in China's vast factory sector dipped in April as new export orders shrank, according to a survey released on Tuesday. It followed reports showing growth unexpectedly slowed in the first quarter to 7.7 percent and power generation grew at the weakest pace in six months in March.

"Although we believe that probably we'll be looking at 7-8 percent growth, there's a risk that China may be undershooting that level," Vassilis Dagioglu, head of asset allocation portfolio management at Mellon Capital, said at Monday's Reuters FX Summit.

The World Bank cut its gross domestic product (GDP) growth projection for China by 0.1 percentage point to 8.3 percent for 2013. China, on the other hand, has set a 7.5 percent GDP growth target for this year.

John Taylor, chairman of FX Concepts, with assets under management of about $2 billion, also said the low level of electricity consumption in China is further indication the Chinese economy is slowing.

The recent decline in prices of oil and copper -- commodities highly sensitive to economic growth -- is another indication of worries about the global economy, Taylor said.

Copper hit an 18-month low and Brent crude oil fell below $100 a barrel on Tuesday.

YEN BENEFITS

Uncertainty about the global economy could benefit the yen. Mellon Capital's Dagioglu said the yen still exhibits a negative correlation with risk, strengthening when there are shocks in financial markets as Japanese investors repatriate money back home.

"We're forecasting that the yen is going to be strong between now and July," FX Concepts' Taylor said. "I think in the next quarter, we'll trade between 92 and 102, and I'd be more inclined to think 92." Taylor expects the global economy to slow in the second quarter.

The dollar rose to within striking distance of 100 yen on Monday, a level last breached in 2009.

Despite a slowdown, fund managers said China's growth rate at 7.7 percent is still significantly above what other major economies are seeing. China is adjusting its economy to boost domestic consumption and the world economy is also less reliant on Chinese growth than in the past.

"Now we're seeing a lower level of global growth but a rebalancing of global growth," said Alessio De Longis, senior portfolio manager at Oppenheimer Funds in New York. Oppenheimer has $208 billion in assets under management.

"Remember a few years ago when China was growing at 12-14 percent, we still found ways to be negative about it."

The Bank of Japan's aggressive monetary easing has sparked concerns about the impact the yen's sharp fall will have on exporters from South Korea to China and around Asia, a scenario which could trigger competitive devaluations across the region.

The G20 major and developing countries avoided any direct criticism of Japan's policies over the weekend and appeared to accept the need to reflate the world's third largest economy as part of efforts to invigorate a shaky global economic recovery. But the group added it would be "mindful" of possible side effects from extended periods of monetary stimulus.

The dollar has risen 15 percent against the yen so far this year, while the euro has risen 13 percent.

De Longis said while the weakening of the yen is creating challenges for some economies like Korea and Taiwan, others such as Thailand and Malaysia, which provide intermediate goods to Japan, are well positioned to benefit from increasing demand for Japanese exports, as Japan will need more intermediate goods to build from.

"There's clearly a major impact in Asia, but it doesn't have to be a unilaterally negative one," he said. "Because at the end of the day, if we manage to reinvigorate the third largest economy in the world, somebody will clearly benefit from it."

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(For other news from Reuters Global FX Summit, click on www.reuters.com/summit/FX13)

(Additional reporting by Steven C. Johnson; Editing by Chris Reese)

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