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As China Slows, US Can Pick Up the Ball

The recent sharp declines in China’s stock market have rattled global stock markets and raised concerns about a slowdown for the Asian powerhouse.

But experts told CNBC that the country’s slowdown won’t be similar to those of Western nations and that a rebound in the U.S. could pick up the slack for global economic growth.

"It's slowing Chinese-style - not U.S. or European-style, and I think you're just starting to see markets price a bit of a slow down," Adam Boyton, foreign exchange strategist at Deutsche Bank, said. "You have this incredibly fortunate dynamic. China is slowing at the same point the rest of the world is picking up some steam."

Boyton said China growth should be 8.3 percent this year, down from 9 percent last year. For the first quarter of 2010, growth should slow to 5.7 percent on annualized basis and in the second quarter, it should be 5.5 percent.

He said China's stimulus programs kicked in during the first part of this year.

"Given the economy is more directed, it should be more responsive to stimulus,” he said. “The stimulus is now being withdrawn. We're expecting that to show up in the data. We're seeing it show up in real time in the equities market."

"I think we're fortunate that as we're getting this China slowing it's coming against the backdrop for the U.S. recovery,” he added. “I would argue the U.S. still leads. It's still the U.S. demand for good that drives the Chinese growth cycle. It's a lame consumer, but it's a better consumer than it was three months ago, and in six months it will be a better consumer than it is today."

"The issue for the S&P 500 from my point of view is we've heard from a lot of companies in the U.S. that demand is not that good ... what they have said though, especially global names like Caterpillar, is that demand in China is pretty good now," said Dan Greenhaus, chief economic strategist at Miller Tabak.Greenhaus. "What we've had is part of the story is growth out of China. Where I'm seeing a disconnect here is it worked on the way up. But now if you're going to see China slowing down somewhat, in theory our equities markets should be tightening and its not."

"If the pace is going to slow down, there has be ramifications around the world. (Chinese) imports of oil were fine but imports of copper were down (in July)," he said.

Goldman Sachs equities strategists, meanwhile, reiterated their call for a sustained second half rally in U.S stocks, in a note Wednesday. They also said they favor companies that have exposure to China, and other BRIC countries, Brazil, India and Russia because of the significantly higher GDP growth.

Adam Boyton, foreign exchange strategist at Deutsche Bank, does see slowing growth for China, but he does not expect it to change the dynamic of the weaker dollar.

"China growth does look set to slow in the second part of this year and first part of next year. The beginning weakness in its equities market on the back of that growth outlook in China shouldn't be a surprise. It underscores that commodity currencies are pretty fully priced. I think what's still more important for the dollar and the euro is Fed policy...I think you can put these two stories in separate buckets."

Boyton also said U.S. growth is picking up as China slows, which should ultimately help lift China. "I think we're fortunate that as we're getting this China slowing it's coming against the back drop for the U.S. recovery...I would argue the U.S. still leads. It's still the U.S. demand for good that drives the Chinese growth cycle. It's a lame consumer, but it's a better consumer than it was three months ago, and in six months it will be a better consumer than it is today," said Boyton.

But the Chinese version of slowdown does not mean its economy comes to a halt. "It's slowing Chinese-style - not U.S. or European-style, and I think you're just starting to see markets price a bit of a slow down," Boyton said. "You have this incredibly fortunate dynamic. China is slowing at the same point the rest of the world is picking up some steam."

Boyton said China growth should be 8.3 percent this year, down from 9 percent last year. For the first quarter of 2010, growth should slow to 5.7 percent on annualized basis and in the second quarter, it should be 5.5 percent. He said China's stimulus programs kicked in during the first part of this year. "Given the economy is more directed, it should be more responsive to stimulus. The stimulus is now being withdrawn. We're expecting that to show up in the data. We're seeing it show up in real time in the equities market," he said.

Greenhaus points out the $585 billion Chinese stimulus program, in effect, is twice as large as the U.S. program, relative to the size of its economy. "Part of the affect was an increase in yuan loans," he said. Now those funds are being withdrawn. "It's the government taking its foot off the pedal," he said.

Boyton said the U.S. stock market, despite its wobbling this week, has largely shrugged off the Chinese market story. "The China story retreats into the background" when U.S. data comes into focus. "This is one for which the importance you attach to it depends on which trading day you are in -- the U.S. session or the Asian session," he said.

-- Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

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