China Economy Watch

China's Recent Trade Deficit: Is What You Yuan What You're Gonna Get?

2010-04-17T17:31:00.014+02:00

China is self-evidently both a minefield and a potential graveyard for would-be global economists, the sort of place where reputations are made and lost in the twinkle of a dragon's eye, so I think had better tread rather carefully here. However, having duly noted that only fools rush in, here I go...

China ran its first monthly trade deficit in six years in March, a development which encouraged the country's Commerce Ministry to up the volume a bit on the argument that the need to revalue China's currency was being greatly exaggerated. The debate surrounding renminbi revaluation has also given us one more reason - beyond the recent accusations of the US SEC - to cast a watchful eye over how things are done at Goldman Sachs: the outrageous suggestion from their Chief Economist Jim O’Neill (in this Financial Times article) that if things carry on as they are, China will soon overtake France as the principal destination for German exports (see in depth analysis below).

The problem is, that with the argument having become so politicised, and with so many different interested parties at work, it is fast becoming hard to see wood from the trees, or even the sandals and tee shirts from the high speed trains.

A One-off Deficit?

Looking through the data, it would appear that while China's March performance was undoubtedly a one-off, import growth has been outpacing export growth for some months now. And with imports of commodities surging, and with them commodity prices, it was not really that surprising to find that China swung into a trade deficit of $7.24 billion in March, from a surplus of $7.61 billion in February, according to figures issued by China's Customs agency. Overall imports were up 66% from a year earlier in the moth, with purchases of crude oil and copper at near-record levels in volume terms.

In fact Chinese officials had been signalling for some weeks that March could produce a rather exceptional trade deficit, a development they highlighted to show how China's strong growth has been boosting its purchases from other countries. But beyond the March reading, China's trade surpluses have been shrinking as the government stimulus plan, and extensive bank lending, have boosted domestic demand, and indeed the cumulative trade surplus for the first quarter of 2010 fell 77% from a year earlier to hit $14.49 billion.

On the other hand, according to the Chinese customs department, the March deficit mainly comes from trade with Taiwan, Japan and South Korea, while large surpluses continued with the U.S. and the European Union.

Evidently one month's data is unlikely to convince anybody, and especially when there is so much doubt surrounding the sustainability of China's domestic consumption growth, so the March data is surely unlikely to silence the deafening roar of international criticism of China's trade policies, and indeed European voices are now increasingly being added to US ones.

Evidently March's exports may well have lower than normal as factories took their time reopening after the February Lunar New Year holiday. Exports were up in March, but the rate of increase fell to 24.3% from a year earlier, as compared to the 31.4% annual growth registered in the first two months of the year, although it is hard to tell how much of this weakening was a Lunar New Year effect, and how much the development reflected domestic demand weaknesses among China's main customers.

Looking at the trade balance chart (above), it is clear there is normally a dip in February/March, and this year we may have simply seen an exaggerated version of what is really an annual phenomenon. Certainly, till we see a bit more data it will be hard to separate a stimulus-based surge from the trend.

China: The New Import Powerhouse?

Separating surge from trend however does seem to have turned into something of a problem for Goldman Sachs Chief Economist Jim O’Neill, since he argued recently (in a widely quoted piece) that:

"As far as China’s involvement with the rest of the world goes, the real story since the worst of the crisis is not China’s recovering exports but China’s strong imports. The forthcoming trade release – interestingly due a few days before the Treasury report – is likely to demonstrate enormous import growth again, absolutely and relative to exports. This is seen not just in Chinese data, but in those from many other important trading nations. Indeed, quite remarkably, Germany’s trade with China is showing such strong growth that by spring next year, on current trends, it might exceed that with France".

This is quote a claim, and evidently impressed both Tyler Cowan at Marginal Revolution, and the Economist Free Exchange Blog, since they quote precisely this extract in support of their argument that the threat to global economic stability represented by China's trade surplus is being rather overdone (which may or may not be the case), and they obviously take his China overtaking France claim as good.

As a student of German export performance, I however did not. The most important point to bear in mind is that Germany basically missed out on the first wave of China import growth (with the market being largely dominated by Japan). To give an indication, in 2008 German exports to the Czech Republic and to China were of about the same order of magnitude, a data point which is reasonably suggestive of the extent to which German export growth 2005 - 2008 was dependent on growth in Central and Eastern Europe (both inside and outside the EU). Growth in this market has, of course, now come screeching to a halt, hence the renewed German interest in China, and in general terms, non-European export destinations - which is one reason why, at the end of the day, the sharp drop in the value of the Euro has been as much to Germany's advantage as it has to that of any other Eurogroup country.

So the key point to note is that German exports to China started from a comparatively low base, and hence even a sudden sharp surge does not make that much of a dent in the rankings list.

So just what are the facts? Well, according to the most recent release from the German Federal Statistical Office, German exports to China were worth 36.5 billion euros in 2009. Which means that, compared to 2008, exports to China were up around 7%, while total German exports declined 18.4% during the same period. So evidently the importance of German exports to China has been growing, but nothing like as much as O'Neil claims. Really!

Given that German exports to China have been running at something like 40% of exports to France, I thought I would take a look at the actual data. There are two available sources for such information: the German Statistics Office, and the OECD. Here is will use the OECD data. As can be seen in the first chart, there can be no doubt that German exports to China have been growing steadily and impressively over the last 3 years, but it is equally evident that they are still well, well short of those to France, and by no stretch of the imagination could it be thought feasible that China will overtake France as an export destination in the near future.

The second chart puts things in a longer term perspective, and what stands out is the fact that while German exports to China have followed a steady path, while those to France slumped significantly in 2008 as a result of the global economic crisis. So what this means is that exports to France are unusually low (and thus it is impossible to talk of trend), while those to China are unusually (and possibly unsustainably) high, given the impact of the stimulus programme. So to extract his "trend" (which is in no case valid) Goldman Sachs' Chief Economist seems to be assuming a worst case scenario for France and a best case one for China: hardly a balanced methodology. Or does Jim O'Neil really want to tell us he is discounting the possibility of a sustained recovery in demand in the OECD economies? Even without the benefits of our own "proprietary indicators", simple testimony of the naked eye should tell us he is wrong here.

Which is a pity, since stripped of its exaggerated claims, his substantive argument may not have been entirely false. Also we should not forget that Germany imports Chinese products (55.4 billion euros worth in 2009, as compared to the 36.5 billion euros worth of exports), and ran a trade deficit of 18.9 billion euros last year (or roughly 50% of the total value of exports) while Germany ran a trade surplus of some 27 billion euros with France.

Whatever You Yuan

In fact the impact of a revaluation in the renminbi may be much more complex than many seem to be assuming, and one good example of the kind of perverse consequences we may see is offered us in a really interesting research note from Alexandre Schwartsman (Bank Santander, Brazil) entitled "What Do You Yuan?"

There is an ongoing debate about how China should handle its currency in face of both political pressures and signs that inflation may be accelerating. Such challenges raise the possibility of the resumption of yuan appreciation trend that prevailed between 2005 and 2008. Of course, we claim no special knowledge on whether or when Chinese authorities will decide on the issue, but in our opinion, eventual decisions on that could have considerable implications for Brazil.

We do not think, however, that the direct effects through the trade channel are the most important part of the story. While it is true that China has become the largest market for Brazilian exports, we rush to note that it still represents only 13% of Brazilian exports (which, in turn, are equivalent to about 12% of Brazilian GDP). Moreover, even its current status as the main customer for Brazilian exports is threatened at the margin by the recovery of exports to the U.S. and Argentina.

Indeed, we believe the main channel of transmission to Brazil is likely to be through commodity prices. We argue, with the help of a small theoretical model, that a stronger yuan should imply higher commodity prices in dollar terms. In fact, it is possible to show that, if dollar commodity prices do not change in response to a stronger yuan, there would be excess demand for commodities, which would eventually drive their dollar prices up.

The economic intuition which lies behind Schwartsman's argument is really very simple, but the logic is also quite compelling. Basically, it depends on two points:

i) China domestic demand growth is more energy intensive than the OECD average
ii) China is large enough to be (to some extent) a price setter, and not simply a price taker.

Put another way, the income elasticity of energy consumption in China is greater than it is in the developed part of the Rest Of the World. This also applies to the energy component of agricultural produce, with important positive consequences for countries like Brazil. That is to say, China consumes energy directly, and indirectly, via the energy input which goes into the food production (fertilizers for soya beans in Brazil, for example) that it outsources. So there is a direct, and an indirect impact.

The net consequence of this, is that the Santander analyst expects the dollar price of commodities like oil to rise sharply on the back of any significant yuan revaluation, making China richer (in relative terms), and logically the developed world poorer. Again, and put in other words, the terms of trade are about to change against Europe, the US and Japan, and possibly bigtime, as the Yuan and other emerging market currencies rise. On the other hand, Brazil and other resource rich emerging economies stand to benefit, equally bigtime, in what will be one of the largest rebalancings of the global economy seen in many a long year. The main losers, it seems to me, will be the long-term structurally unemployed we now have in the developed world, and those living in poor countries with few natural resources.

Where Do We Go From Here?

Where we go from here on the China trade front is now very hard to tell. Evidently, on the one hand, evidence continues to mount that more flexibility in yuan parities in in the pipeline. But will the much sought after revaluation really do all that heavy lifting that is being expected of it? After all, Germany's currency was effectively revalued upwards on joining the Euro, and the country then spent several years putting downward pressure on cost elements, with the result that the German trade surplus was even larger (as a % of GDP) in 2008 than it was in 1998. And China's almost unique demographic trajectory also suggests that promoting internal consumption as a growth driver may be up against significant constraints. Life Cycle Theory Nobel Franco Modigliani, in what was his final published paper (2005) - The Chinese Saving Puzzle and the Life-Cycle Hypothesis - drew attention to this oft neglected dimension which evidently forms part of the problem. At the very least, some simple economic theory suggests that all may not be as simple here as it seems at first sight.

On the other hand Chinese officials, far from showing signs of alarm at March's deficit, generally seem to have welcomed the development. According to Zheng Yuesheng, director of Statistics at China's customs office, "This kind of deficit is healthy as it happened while both imports and exports experienced rapid growth," and in any event, as he also points out, China will undoubtedly continue to run (smaller) trade surpluses over the long term. This, at least, has the benefit of being a realistic, and pragmatic assessment of the situation. All we need now is for a bit of this realism and pragmatism to work its way steadily westwards.

China's Economy Continues To Grow, But All The Old Doubts Remain

2009-09-11T15:45:00.011+02:00

China’s economy showed new signs this week that it continues to maintain momentum with the announcement that investment, industrial output and credit all expanded more rapidly in August.

Output and investment increases both came in ahead of analysts’ forecasts and came on the back of a string of July data that had suggested the recovery might be weakening. The one notable exception was, however, on the trade front, where the decline in exports and imports compared to August 2008 was sharper than expected.

China’s economy has been rebouning from the weakest growth in more than a decade on the basis of a $585 billion stimulus package which has produced a sharp surge in new loans surging and driven up manufacturing output and property sales.

The robust August numbers will intensify the debate about when China should begin withdrawing some of the massive fiscal and monetary stimulus it has injected into the economy since the end of last year.

However, the dramatic increases in new lending and money supply this year, combined with rising property and equity markets, have raised fears that government policies are creating a series of bubbles in the economy.

Bank loans rose by Rmb410.4bn in August after increasing by Rmb355.9bn the month before, and by Rmb271.5bn in the same month last year, while the M2 measure of money supply increased by 28.5 per cent.

Quite where and how all this will end in the longer run is frankly anyone's guess, since I personally can't recall an economy with these characteristics in this type of situation before. That is, we have an economy which normally runs a large trade surplus, and has massive foreign exchange reserves falling back on a massive dose of government spending, pressing what Krugman would call Keynes button "G" three or four times consecutively in order to finance an orgy of lending and unaffordable housing construction, which may all be comfortably written off in the future if the global economy eventually recovers and China can blitz the planet with products from all that currently "excess to requirement" capacity that is steadily being built up. All we can say is, hold on to your seats, and keep your eyes peeled to the screen, since whichever way this goes it is surely going to be interesting.

China's GDP Growth Rate Continues To Recover

China looks as if it could hit its full-year growth target of 8% after a surprisingly strong second quarter which was distinguisjed by a strong surge in investment driven by powerful fiscal and monetary stimulus. Annual gross domestic product growth accelerated to 7.9% from 6.1% in the first quarter, making China the planet's best-performing major economy. The acceleration in China's economic growth follows the application of a 4 trillion yuan stimulus package, record lending and a rebound in property investment and sales that have to some extent offset the slump in the nation’s exports. Consensus economists now anticipate China’s GDP growth will accelerate to a 9.5 percent pace next year following an 8.3 percent rate in 2009,

The most recent data suggest that China is likely to show a further growth increase in Q3 from the acceleration in Q2. While exports continue to deteriorate on an year on year basis, they are now managing to squeeze out some sort of increase on a month by month basis.

China's growth really has been quite robust for more than 20 years now, and even though it dropped back somewhat after the 1998 crisis, it never really fell below 8% or so annually averaged over time. Which has to lead you to ask yourself just how much of that export driven surge post 2002, which was fuelled by massive credit in a number of developed economies, really is sustainable? Trend growth at this point is likely to be nearer to 7% a year than it is to 10%.

China is now well on the way to becoming the world's number two economy, behind the United States. In this sense, if China does manage to head straight forward full speed ahead this will mean the current recession will have been decisive as Japan and Germany slump inexorably backwards. These latter two countries just don't have the internal leverage to run the kind of stimulus programme China is applying due to the weight of their ever more elderly population.

Industrial Output Bounces Strongly Back

China’s industrial production rose more than forecast in August, lending unexpectedly climbed and retail sales advanced, indicating growth in the world’s third- biggest economy is likely to accelerate. Industrial output expanded by a 12-month high of 12.3 per cent in August from a year earlier after a 10.8 per cent increase in July, although production in August last year was held back by Olympics-related factory closures.

GM sales in China last month jumped to 152,365 vehicles,up by more than 100 percent over last year, as tax cuts and stimulus measures spurred demand. The company are forecasting 2009 sales to rise by more than 40 percent from 1.09 million last year. Total output for all carmakersmakers may increase by around 28 percent this year to as many as 12 million, according to China’s leading planning agency earlier this month. Car production accounts for about 2 percent of GDP.

And Investment Surges

Fixed asset investment inched up to a rate of increase of 33 per cent over August last year, after expanding by 32.9 per cent in July. Investment in real-estate development grew 14.7 percent in the first eight months after an 11.6 percent gain in the first seven months, the statistics bureau said yesterday. House prices in 70 cities rose 2 percent in August, the fastest gain in 11 months.

Overcapacity is now a serious problem in China. According to a recent report authored by the Financial and Economic Affairs Committee (FEAC) of the National People's Congress (NPC), nineteen industries are currently plagued by problems of overcapacity, although the report failed to provide a detailed list.

The number of industries thought to be effected has now almost doubled since the State Council first began addressing the problem of overcapacity back in 2005.

The FEAC report noted that when the new round of stimulus package investment was unleashed last October, local governments expanded production capacity with no regard for the consequences and some projects were constructed without preliminary assessment or approval from higher authorities.

Liu Manping, a researcher with China's National Development and Reform Commission (NDRC), recently admitted that local governments favoured the construction of large industrial projects since they tended to be the impulsive response of local governments to the sudden access to easy money. Liu also explained that local authorities often split large projects into smaller schemes in order to avoid requiring approval from the NDRC.

The real problem is that the Chinese authorities largely rely - in their attempts to eliminate outdated production facilities - on administrative measures (direct orders to close) rather than market oriented ones.

All too often these measures either have a limited impact, or they are intentionally circumvented.

Chen Ling, deputy-director of China's Metallurgical Economic Research & Development Center, spoke recently about the early days of the campaign against overcapacity in the steel industry,when the government ordered producers with blast furnaces smaller than 200 cubic meters to close their doors.

Upon hearing such news, many small steel mills simply upgraded their blast furnace so that they now use 300 cubic meters, or even larger, blast furnaces. Later, the government again raised the cut-off to 300 cubic meters, but by continuing to increase the size of the blast furnace limit, the government simply pressured steel makers to once again enlarge their blast furnaces and thus production capacity continued to expand.

China is now well on the way to becoming the world's number two economy, behind the Unietd States. In this sense, if China does manage to head straight forward full speed ahead this will mean the current recession will have been decisive as Japan and Germany slump inexorably backwards. These latter two countries just don't have the internal leverage to run the kind of stimulus programme China is applying due to the weight of their ever more elderly population.

And Retail Sales Maintain Their Strong Momentum

Retail sales grew 15.4 per cent from a year earlier as domestic demand remained robust. Sales of motor vehicles were strong, up 34.8 per cent, as a result of government subsidies and tax cuts.

But Exports Wobble In August

Exports fell for a 10th straight month. The decline in imports was the biggest in three months and more than economists estimated. Exports rose 3.4 percent in August from July on a seasonally adjusted basis, the customs bureau said. Imports rose 1 percent. So month-on-month gains were smaller than in July, when exports rose 5.2 percent and imports climbed 3.5 percent

However. in spite of forecasts that exports might start to rebound on the back of restocking in developed economies, the rate of decline in exports increased to 23.4 per cent in August compared to the same month last year, after dropping 23 per cent in July. Imports fell by 17 per cent after declining 14.9 per cent in July. This led the monthly trade surplus to increase again to $15.7bn after recording a $10.6bn surplus in July.

Deflationary Pressures Nonetheless Eased Slightly

Deflationary pressures eased, with consumer price inflation falling 1.2 per cent in August. The rate of decline was nonetheless down from the 1.6 per cent seen in July.

The producer price index was down 7.9 per cent from the same period in 2008.

Facebook Links

2009-06-20T11:49:00.000+02:00

Quietly clicking my way through Bloomberg last Sunday afternoon, I came across this:

Facebook Members Register Names at 550 a Second

Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.

Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name.

Mein Gott, I thought to myself, if 550 people a second are doing something, they can't all be wrong. So I immediately signed up. Actually, this isn't my first experience with social networking since I did try Orkut out some years back, but somehow I didn't quite get the point. Either I was missing something, or Orkut was. Now I think I've finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:

Ok. This is just what I've always wanted really. A quick'n dirty personal blog. Here we go. Boy am I going to enjoy this.

Daniel Dresner once broke bloggers down into two groups, the "thinkers" and the "linkers". I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don't really fit any mould, and I am hard to typecast, I also have that hidden "linker" part, struggling within and desperate to come out. Which is why Facebook is just great.

In addition, on blogs like this I can probably only manage to post something worthwhile perhaps once or twice a month, and there is news everyday.

So, if you want some of that up to the minute "breaking" stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let's all go and take a long hard look at the future, you never know, it might just work.

China's Imports and Global Recovery - Brad Setser Need Be Curious No Longer

2009-06-11T12:21:00.003+02:00

Earlier this week Brad Setser was opining on his blog:

“Like everyone else, I am curious to see what China’s May trade data tells us. If China truly is going to lead the global recovery, China needs to import more – and not just import more commodities for its (growing) strategic stockpiles.”

Well Brad need restrain his curiosity no longer, since just this very morning we have learnt that:

China’s exports fell by a record in May as the global recession cut demand for goods produced by the world’s third-largest economy. Overseas sales dropped 26.4 percent in May from a year earlier. That compares with the median estimate for a decline of 23 percent in a Bloomberg News survey of 15 economists, and a 22.6 percent contraction in April.

The decline was the biggest since Bloomberg data began in 1995. And more to the point as far as Brad is concerned China’s imports dropped 25.2 percent last month, compared with a 23 percent fall in April. Hence China just one more time ran an increased trade surplus (up to $13.4bn in May from $13.1bn in April), and it is no clearer to me than it is to Brad how a country running a trade surplus can be leading a surge in global demand. Indeed this months data, far from prodiving evidence of an accelerating "recovery" continues to point towards ongoing weakness in global demand, just like the evidence we are receiving from Germany, and from Japan.

Of course, these are year on year numbers. Month on month, exports seem to have stabilised since the start of the year, while imports are undoubtedly up. As Danske Bank put it in a research note today:

The development in China’s exports was weaker than expected. According to our own seasonally adjusted data, exports edged up slightly and the overall picture remains that China’s exports have stabilised in recent months. However, the rebound in China’s exports since early this year has been weaker than in most other Asian countries, suggesting that the Chinese recovery story has been a major driver in Asian countries’ export recovery in recent months.

This is confirmed by the continued strong growth in China’s imports. According to our own seasonally adjusted figures, China’s imports soared ahead 5.8% m/m in May following an 4.9% m/m impressive jump in imports in the previous month. China’s imports of commodities such as iron ore, coal and crude oil have been extraordinarily strong, increasing speculation that China is currently building strategic inventories of the most important commodities (see chart on next page). For that reason, Latin America (not least Brazil) and the ASEAN countries have benefited recently from China’s strong import volumes.

What matters is not so much the fact that imports are rising, but what exactly the imports are. There is substantial evidence accumulating that - as Brad suggests - China is simply stockpiling commodities as a hedge against future inflation. Some of the best evidence for this came here, yesterday. If this picture is correct, then the situation is unsustainable, as is the run up in commodity prices and stocks which have accompanied it. I note Forex Blog draws similar conclusions this morning:

I would argue that the sustainability of this rally (both in stocks and in currencies) hinges on a return to GDP growth in emerging markets. [The IMF forecasts 1.6% growth in 2009 and 4% in 2010]. But given the gap between share prices and earnings, I’m frankly not convinced that investors actually care about whether the rally is supported by actual data. Instead, investors have complacently been swept up by the same herd mentality that produced the bubble of 2008, and could potentially lead to a rapid and painful collapse in what looks to be the bubble of 2009.

Investment Bonanza?

On the other hand there was a 38.7 percent year on year rise in fixed asset investment in May. This was an even larger increase than the one registered in April, when FAI rose 33.9 per cent. For the first five months of this year, investments increased 32.9 per cent from the same period in 2008, compared with 30.5 per cent in the first four months of the year and against an estimate of 31 per cent. According to Alaistair Chan, at Moody’s Economy.com.

“Fixed asset investment in China continues to increase on the back of state-directed projects ... This will help keep the economy growing but there are increasing concerns about the amount of lending that has been required to fund the projects"

Quite. And as a Chinese economist friend wrote me to say: "just how much of the current property demand is speculative? I also have my doubts whether even official inventory levels accurately reflect all the inventory out there, especially when I read anecdotes like this ... "

As a Beijing homeowner myself, I’ve experienced this puzzling phenomenon firsthand. We have been told that the value of the condo we bought last year has gone up 30% based on sales of new nearby developments, but it’s impossible to confirm since there is no secondary market. Originally we tried to rent the place, but we couldn’t find takers at any price that could remotely cover the mortgage, despite a prime location. When we decided to move in instead, we discovered that while the building was sold out long ago, hardly anyone actually lives there. Same with another 800-unit project down the street: every unit went for top dollar well before completion, but now the lights are off and nobody’s home.

In fact the volume of empty apartments across the country hit 91million sq metres at the end of last year, up 32.3 per cent from a year earlier, according to official figures. But those numbers included neither the huge volumes of completed real estate projects whose owners are waiting for market conditions to improve before they put them on the market, nor the estimated 587 million sq m of apartments sold in the past five years but left empty by their owners.

And that part of fixed investment which is ending up, not in flats for inventory, but in productive capacity. Well, as MacroMan says this morning:

But as capex growth keeps humming along..(we could ask)..does the world really need more manufacturing capacity at this juncture? .....(it all)...of course, begs the question of who the Chinese plan on selling to. It's all well and good continuing to build factories and export capacity, but the real world isn't like Field of Dreams; just because you build it doesn't mean that customers will come. Yesterday's US trade figures were telling in that regard. Imports declined again in April; while an inveterate "second derivative" believer may find reasons for optimism in the slight lessening of the pace of import decline in yesterday's data, Macro Man is rather more sceptical. And the fact that US exports declined as well suggests that domestic demand in the rest of the world remains flaccid at best.

So, and finishing up where I started, with the trade balance, as Brad said: "China needs to import more – and not just import more commodities for its (growing) strategic stockpiles". However, to quote again my Chinese economist friend: Macroman's data on China's imports of commodities is surreal too. To which Claus Vistesen responded: "Yep, this was what I thought, and we should expect Brad Setser to be all over this". We certainly should, we certainly should. On you go Brad.

China's Prices Continue To Decline As Industry Recovers (Updated)

2009-06-10T08:44:00.006+02:00

Consumer prices fell again in China in May, although less sharply than they did in April. This lead some to hope that deflationary pressures are begining to ease, but I think it is far too early to start drawing this kind of conclusion. Indeed, like Brad Setser:

"I am curious to see what China’s May trade data tells us. If China truly is going to lead the global recovery, China needs to import more – and not just import more commodities for its (growing) strategic stockpiles.”

The consumer price index fell 1.4 per cent from a year earlier, compared with a 1.5 per cent decline in April, marking the fourth straight month of falling prices. On a month-on-month basis, the National Bureau of Statistics said the CPI dropped 0.3 per cent from April’s level.

The decline in food prices eased significantly, from 1.3 per cent in April to 0.6 per cent in May. Prices of non-food items, however, fell 1.7 per cent last month, more than April’s 1.5 per cent. However, the producer price index, which measures prices paid at the factory gate, fell 7.2 per cent in May. This was sharper than the 6.6 per cent fall in April.

Manufacturing On The Rebound?

The CLSA China Purchasing Managers Index rose to 51.2 in May from 50.1 in April, making May the second consecutive month the CLSA PMI was above 50.0, after eight months of being below the critical line. The rate of destocking increased in May, which was encouraging given there is some anecdotal evidence that production may be running ahead of orders. On aggregate the reverse seems to be true. The CLSA China PMI is compiled by U.K.-based research firm Markit Economics. The export order index increased to 50.1, the first expansion in 11 months. The output index fell to 56.9 from 57.4 and the new order index dropped to 56.2 from 56.6.

In fact in China there are two indexes, a fact which has lead to some controversy. The second index produced by the government-backed Federation of Logistics & Purchasing has repeatedly shown slightly higher readings, a feature which may be the result of giving a slightly larger weighting to the state enterprises, which are more oriented towards the domestic market. The May PMI saw the CFLP benchmark reading fall to 53.1 in May from 53.5 in April. This was the third consecutive month this index has held above 50.

So despite a good deal of controversy about what exactly is happening in China, and how sustainable what is happening actually is, it does seem that, for whatever reason, manufacturing industry is expanding at this point.

China’s Industrial Production Figures Press Leaked

The 21st Century Business Herald have reported China’s industrial production ahead of the official release date. The report says fixed-asset investments for May, due out Thursday, will show a 32.9% rise, while the month's industrial production and retail sales, due Friday, will post gains of 8.9% and 15.2%, respectively.

The figures were apparently derived from data circulating within government days ahead of public announcement. Reports in the mainland Chinese "21st Century Business Herald" and in Hong Kong's "Ming Pao" had already managed to predict the above consumer and producer price results ahead of today's official release, which raises questions about what exactly is going on here.

The accuracy of these newspaper forecasts is better than those of most economists, raising more than just eyebrows. Merrill Lynch said the results, rather than being a lucky coincidence, show that the "whispered numbers" referred in the reports are reliable. "Today's release confirms those whispered inflation numbers, meaning other whispered numbers are likely to be highly credible," Merrill Lynch analysts said in a research note today.

Retail Sales, Industrial Output and New Lending Data

China’s new lending doubled in May and industrial output and retail sales climbed pretty much in line with the data which was leaked earlier in the week by 21st Century Business Herald (see above).

New loans jumped to 664.5 billion yuan ($97 billion) from 318.5 billion yuan a year earlier. Industrial-output growth accelerated to 8.9 percent year on year and sales rose 15.2 percent.

Today’s data add to accelerating fixed-asset investment and surging auto and property sales in signaling that rapidly growing bank lending is succesfully countering the exports slump - for the time being anyway. But this very same record lending is stoking concern that China’s recovery may come at the expense of inflating asset bubbles and adding to the bank bad loan books.

M2, the broadest measure of money supply, rose 25.7 percent in May from a year earlier, according to central bank data, following a record 26 percent gain in April. Fitch Ratings said last month that it’s “increasingly wary” of China’s banking industry as it expects an increase in bad debts, and the nation’s banking regulator has urged lenders to ensure they don’t loosen management of loans.

Societe Generale note the following in today's research report:

China’s growth moving into dangerous territory

To describe the economic support measures in place in the Chinese economy as expansionary fiscal policy is not entirely correct. For the money is not being handed out from the public purse. It is being handed out by the Banks. Sure, they are acting as fiscal agents for Beijing, but the point highlights how China is enjoying a heady liquidity boom. It has been these liquidity booms that have always tripped China up....... and requires liquidity drainage that often overshoots. Given Chinese banks extended nearly CNY5trn of lending in the first quarter alone, this was equivalent to 70% of GDP, These liquidity booms are the types that China has always gotten into...... The sheer size of lending in the first quarter was equivalent to around 70% of that quarters GDP. Full-year lending is now likely to be close to CNY10trn – equivalent to nearly 30% of 2008 GDP.

On the face of it, China's car industry is among the winners from government efforts to spur growth, as China extends its lead over the U.S. as the world’s biggest auto market this year, with output climbing 29 percent in May. But is this as simple as it seems. As they say here, perhaps not:

At the same time, though prices vary from city to city, it is fair to say
China’s housing market which is said to have dropped 20% since this time last
year has largely made that back up this year as prices have rebounded.

All in all China looks in robust health and set to resume its place as
the engine of world growth just as soon as the rest of the world gets its act
together – right? Well we hate to be Doubting Thomas’s but well we have our
doubts. Those house sales have been supported by easy loans and reduced interest
rates. That is a phenomenon that the government could keep in place for some
time, years possibly providing the housing market doesn’t begin to overheat
again. But exports are still down, by 20% year over year according to the well
respected Brad Setser, ignoring the fact the market added another 30% in Q3 2008.

There are some apparently contradictory numbers coming out of China at
the moment. Take those car sales as an example. Our man on the ground tells us
BYD, a noted Chinese car maker, reported 30,000 car sales of one model by end of
last year, but the number plate agency recorded only 10,000 new cars of that
model registered for use on the road. What happened to the other 20,000 are they
running around without number plates? In a police state, I don’t think so. Our
understanding is auto sales are recorded in China when they leave the factory,
not when they are registered on the road, so dealers can build up inventory
while car “sales” are rising.

China's Manufacturing Industry Expands In April While Prices Fall (Updated)

2009-05-11T09:45:00.009+02:00

China’s manufacturing expanded for the first time in either eight or nine months (depending on which index you chose - see below) as the decline in export orders moderated and investment surged on the back of the government’s 4 trillion yuan ($586 billion) stimulus package.

The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 50.1 in April from 44.8 in March.

The output index climbed to 51.3 from 44.3, the first expansion in nine months, while the reading for export orders rose to 48.8 from 41.4 in March. The total new-orders index climbed to 50.9 from 43.6 and the employment index rose to 50.9 from 47.1, the first expansions in nine months for both measures.

On the other hand the official (government sponsored) China Federation of Logistics & Purchasing manufacturing index also showed growth, in this case for the second consecutive month, with the headline index rising to 53.5 in April from 52.4 in March.

There are various differences between the two indexes (for a summary of the issues raised see my last month's post here), but the gist of the matter is that the government-backed measure is weighted more than the CLSA index toward large state-owned enterprises, which have benefited more directly from the government stimulus measures.

Is China Suffering Outright Deflation?

China’s consumer prices fell for a third month running in April and were down 1.5 percent from a year earlier, after falling 1.2 percent in March.

Producer prices fell 6.6 percent, following a 6 percent drop in March. The fall, which was largely produced by declining energy prices, was the biggest year on year drop since the turn of the century.

Bank lending also slowed in April, following three months of very strong growth. According to central bank Governor Zhou Xiaochuan lending was “approximately” 600 billion yuan ($88 billion) during the month, about a third of the record 1.89 trillion yuan in March. The official figure is due to be released this week. If confirmed, new loans of 600 billion yuan would be about 30 percent up on April 2008 which compares with a sixfold increase in March.

Update - Exports Fall Year On Year In April

The latest trade figures from China seem to confirm the idea that world trade is NOT taking off at this point. As a result China's economy is coming under a lot of pressure. While March overseas sales were down 17.1 percent from March 2008 - to $90.29 billion - in April exports were running at $91.9 billion, very slightly up on March, but 22.6% down on April 2008. In fact seasonally adjusted figures suggest a 32.8 percent month on month increase in exports from March and a 14 percent increase in imports, according to calculations from the Chinese Customs Bureau. So it is not all bad news. On the other hand we need to think about the fact that China currently has a lot more export capacity than it did a year ago.

Basically internal demand is largely being maintained by increasing government spending - hence the news that investment in factories and property jumped 30.5 percent from a year earlier in the first four months of the year, thanks largely to the wave of bank loans for government stimulus projects - but this is only a stopgap.

China will have to await a rebound in global trade (and we have no idea when that will come, or how) and grit its teeth in the meantime. The OECD currently forecasts that global trade will shrink 13 percent in 2009 as banks cut back on credit to exporters and importers, so there is still some considerable way to go with all this.

Industrial Ouput Growth Slows

China’s industrial output growth slowed to an annual 7.3 per cent in April, from 8.3 per cent growth in March, only adding to all the doubts over whether a Chinese recovery really is under way. The growth in factory output last month was less than half the year-on-year rate achieved in in April 2008 and most of the growth seems to have been a result of the government’s economic stimulus measures.

But retail sale growth remained reasonably healthy in April, rising by 14.8 per cent from a year earlier (to Rmb934.32bn). This was a similar rise to March’s 14.7 per cent growth. Since these numbers are not price adjusted I have created a "home made" price adjusted version, which can be seen for comparative purposes in the chart below. As we can see, nominal (current price) sales growth was much higher than real growth during the inflation burst, but the nominal chart drops below the skyline as deflation sets in an prices start to fall. This then is a fairly graphic illustration of what deflation means, since we can now expect this real/nominal disparity to continue, making everyone's economic decision making just that bit more difficult.

Another factor adding to the general state of confusion were figures released by the government on Wednesday that showing that electricity production, which is often regarded as a proxy for economic growth in China, fell by 3.5 per cent from a year earlier in April. When asked, government officials have been repeatedly unable to explain how industrial production can be growing while electricity production is falling. Since it is unlikely that Chinese industries are making large advances in energy conservation the most probable explanation is that the current slowdown has had a more severe impact on energy-intensive heavy industry. One example of this would be that China’s crude steel output fell 4 per cent in April from March. Below you can see the OECD leading indicator chart (which includes electricity output), and this may give is the nearest indication we are going to get of the path of the Chinese economy in recent months.

According to the stats office, total investment in fixed assets were 3,708.2 billion yuan from January to April, a year-on-year rise of 30.5 percent. Of which, state-owned and state-holding enterprises invested 1,605.5 billion yuan, surging 39.3 percent, while real estate development, valued at 729.0 billion yuan, went up only 4.9 percent. I think this just about says it all. Exports are way down, real estate is stalled, and output is being ramped up in the state run light industry sector, and in civil engineering.

And right now, as mention in the post above, internal price deflation is steadily setting in while the rate of new loan growth is slowing. So, hold tight everyone, this could get to be a bumpy ride.

Manufacturing Industry Contracts Again In March (Update 2)

2009-04-01T07:59:00.008+02:00

China’s manufacturing industry shrank for an eighth straight month in March as collapsing global trade cut exports and growth across Asia. The CLSA China Purchasing Managers’ Index dropped to a seasonally adjusted 44.8 last month from 45.1 in February. Any reading on these indexes below 50 means contraction.

The manufacturing component of the index continued to increased, rising for a fourth month from a record low of 40.9 in November. The export orders index rose to 41.4from 39.5 in February. New orders climbed to 43.6 from 44.2. Output gained to 44.3 from 43.9, while the employment index rose to 47.1 from 46.6, its second increase in eight months.

“A worsening of domestic manufacturing orders lies behind the drop in the PMI and accords with what we are seeing on the ground in the steel industry,” said Eric Fishwick, head of economic research at CLSA in Hong Kong. “Expect the production index to show softness in April......More encouragingly, export orders continue to improve,” he added “They are still falling but at the most moderate pace since October.”

Update: Rival Indexes At Work (Thursday 8 April)

Well, following a question in comments (see below) I think it worth adding a few details about the "other" PMI reading which is available, the China Federation of Logistics & Purchasing (CFLP) one. The CFLP PMI rebounded to 52.4% in March 2009, up from 49.0% in the previous month. The index was back to the expansionary zone of higher than 50% for the first time since October last year. Output index, new orders index and purchases of inputs index were also higher than the critical level of 50% in March. Except stocks of finished goods, all sub-indices were higher than their respective levels in the previous month. Of which, imports index grew strongly by 7.0 ppt. to 48.8% in March, compared to the previous month.

Many commentators have taken the CFLP reading at face value without bothering to contrast. Thus Bloomberg's Li Yanping, in a very bullish article:

China’s manufacturing expanded for the first time in six months, spurred by the government’s 4 trillion yuan ($585 billion) stimulus package. The Purchasing Manager’s Index rose to a seasonally adjusted 52.4 in March from 49 in February, the Federation of Logistics and Purchasing said today in Beijing in an e-mailed statement. A reading above 50 indicates an expansion. The expansion may help President Hu Jintao achieve his target of 8 percent economic growth for the world’s third- biggest economy. The report comes as he attends a Group of 20 summit in London where world leaders are discussing remedies for the worst global recession since World War II. Hu’s stimulus package already triggered jumps in urban investment and loan growth in the first two months of this year.

or PNB Paribas:

China Logistics Information Center (CLIC) release March PMI rose to 52.4 from 49 of February, the fourth months of continues improvement. PMI breached 50 the first time since September 2008, suggesting the industrial sector is resuming sequential expansion after 5 months of continuous drop.

Overall, the NBS PMI suggest that March industrial sector resumed sequential expansion despite further deterioration of export, this recovery is due to strong fiscal stimulus, aggressive credit expansion at 24.5% y/y pace and relative resilient household demand for property, autos and other durables. Though export outlook remain gloomy, however the G20 and global quantitative easing seem to be providing a floor to global demand. While Q2 growth should remain anemic, however the rebound of PMI suggests Q2 domestic demand growth is on an increasingly firm footing.

PNB Paribas basically put the difference down to differences in sample size:

The widening gap between CLIC PMI and CLSA survey PMI is due to different sampling, CLIC survey focused on 738 major industrials accounting for 20% of VAIO.

But as I indicate in comments, the difference is only in part about sample size, there is also a difference in methodology, largely connected with seasonal adjustment, not an un-important issue when the lunar new year impact is knocking around somewhere in the data. Indeed CLSA made this point abundantly clear in a note released alongside their report:

"It is true that the CFLP survey sample size is larger than that of the CLSA China PMI...therefore the standard error of the (population) estimates from the CFLP survey should be around 25 percent smaller than those from the China PMI," according to the CLSA note released on April 1. "However in practice all of this is academic. Differences in the samples are dwarfed by differences in how each set of statisticians adjust for seasonality in the data," said the note. CLSA said it had tuned the March figure as the February and March varied in number of days in a month and the latter month affected by the long Chinese lunar New Year holiday. Though both sides made seasonality adjustment, the CFLP figure was usually boosted by around three points by seasonality in March, said the CLSA note.

So you can accept the version you want to accept here, but be careful, since the level of confidence to be attached to either reading is moderate. At the end of the day the proof of the pudding here will be in the eating, when we get the March year on year industrial output data, ince this will either be just slightly up, or just slightly down on March 2008 -and remember in the meantime there has been a large expansion incapacity.

Second Update Monday April 13

And well, the mystery only deepens, since now we have an advance on the statistical data (thanks to Premier Wen Jiabao) and we learn that China's industrial output was apparently up by 8.3% year on year in March:

China's industrial output rose 8.3 percent in March, in a sign that a huge stimulus package is kicking in, Premier Wen Jiabao said in an interview published on Monday. Last month's growth accelerated from the 3.8-percent rise in the first two months as domestic demand continued to improve, Wen said, according to the China Securities Journal. Fixed asset investment and retail sales, which measure spending on infrastructure and consumption respectively, also increased quickly in the first quarter, he said in an interview while in Thailand for the ASEAN summit at the weekend. All this showed the economy was performing "better than expected" thanks to Beijing's measures to tackle the international financial crisis, he said. China in November unveiled an unprecedented four-trillion-yuan (580-billion-dollar) stimulus package to ward off the worst effects of the global crisis. However, Wen said the nation's export-dependent economy was still facing major difficulties due to a sharp contraction in foreign demand, which has placed increasing pressure on employment. "The international financial crisis has not yet hit the bottom. It's hard to say that China alone has steered away from the crisis," he said. "We should never overlook (the risks)." Wen's comments came just days before the National Statistics Bureau is slated to release first quarter data on the Chinese economy on Thursday. Tai Hui, an economist with Standard Chartered in Singapore, said the March growth in industrial output was boosted partly by companies filling their inventories after depleting them in recent months. However, the level of growth remains modest compared with before the crisis, and the overall economy is still weak, he said. "The economic environment,although it has improved, remains relatively weak due to the global financial turmoil," he said.

The mystery deepens in part becuase exports fell in March, more slowly than February, but still sharply - 17% yoy (following a 25.7% drop in Feb):

China's exports fell 17 percent in March, a less sharp contraction than the month before, amid signs the plunge in overseas demand may be easing, the government reported Friday. But while the decline in exports eased somewhat, a sharper weakening in imports pushed China's trade surplus to $18.56 billion, up from $4.84 billion the month before, the General Administration of Customs said. Exports totaled $90.3 billion in March, the fifth straight month of year-on-year declines due to the global downturn. In February, exports sank 25.7 percent from a year earlier in the worst drop in more than a decade. Imports in March fell 25 percent to $71.7 billion, the customs data showed. China's imports fell 24 percent in February. "The pace of contraction in exports has moderated notably from January-February levels, as export activity showed signs of stabilization," Jing Ulrich, chairman for China equities for J.P.Morgan, said in a report to clients. "Imports remained weak but there are some initial signs of recovery in China's raw materials demand, driven by government stockpiling and record imports of iron ore," she said.

It's frankly hard to understand why imports would be falling more than exports if you had a domestic demand lead recovery process at work. Brad Setser has a readable go at explaining things here:

The Wall Street Journal puts a more positive gloss on China’s March trade data than I would. To me the overarching story is simple: the data paint a story of deep distress in both the Chinese and global economy. China’s exports were growing 20% y/y (23% actually) in the third quarter of 2008. They were down nearly 20% (19.7%) in the first quarter of 2009. Imports though fell by more, in part because of the fall in oil prices. Imports fell close to 30% y/y in the first quarter. That isn’t just a function of falling commodity prices and fewer imported components either; US exports to China — which presumably include a lot of capital goods — are way down y/y. As a result, China’s trade surplus was larger in the first quarter of 2009 than in the first quarter of 2008 ($62 billion v $41 billion). The global shock has gotten rid of many of the world’s macroeconomic imbalances. American households are saving more and importing less, so the US deficit is down. The oil exporters are no longer running a surplus. Even Japan’s surplus has come down, as demand for Japan’s exports has fallen more rapidly than Japan’s commodity import bill. China’s surplus though has continued to rise.

So this is really the point I think: with a growing surplus (at this point, and on a year on year basis) China's economy isn't going to pull the rest of the world anywhere, since essentially it is still draining-off demand from elsewhere.

But even if China seems an unlikely candidate to pull the global train out of the mire, we still need to try and understand what it is exactly that is going on in Chinese domestic industrial activity. One part of the explanation undoubtedly lies in domestic loan growth. Bloomberg report that China’s new lending surged more than sixfold from a year earlier to a record 1.89 trillion yuan ($277 billion) in March, which compares with the previous high of 1.62 trillion yuan posted in January. Domestic loans grew 29.8% in March, from a year earlier - analysts had been expecting a 25.1% jump. M2 - often considered the broadest measure of money supply - grew year on year by 25.5 percent, according to the central bank.

Bloomberg report that this is the fastest growth rate for M2 since they began compiling data in 1998. China’s banks, which are mostly state-owned, have already implemented new lending almost up to the government’s target of 5 trillion yuan of new loans this year. Indeed, according to JPMorgan Chase & Co. lending may exceeed the target level by as much as 3 trillion yuan. China has certainly mounted the credit tiger in its race to meet the government's official growth target of 8% this year, but while growth propelled by government stimulus and easier access to credit may spawn new projects and stem job losses in China, it won't necessarily translate into industrial profits, and indeed in the medium term it may even lead to a large pile-up of Non Performing Loans.

While no one at this stage believes that the percentage of such loans could reach 2003 levels (20.4% of the total, or 16.5% of GDP) many believe the danger that Chinese vabks could see another wave of loan defaults is rising. This, is the view being taken, for example, by Fitch Ratings, who in a recent report warn that loan defaults could rise to 5% or 6% of total lending, as Euromoney's Sudip Roy argues:

The biggest proportion of new lending by the banks is through discounted bills, which supply working capital. Long-term to medium-term corporate loans are the second-biggest component. More than 70% of the new lending, according to official figures, is through these two channels, which should be low-risk financing."It is hard to predict the quality of all of the lending in January and February but a large proportion of it was mid- to long-term loans to infrastructure projects with stable funding and government support," says Lian Ping, chief economist at Bank of Communications in Shanghai... banks often categorize loans that are rolled over as performing even though they have not been repaid on their original maturity date. "In practice, this means that a one-year working capital loan that is not repaid at maturity can take another one or more years before being classified as nonperforming," says Fitch. Instead, many banks classify these advances as special mention or even normal loans. Special mention loans are effectively non-performing in all but word.
What’s especially worrying, according to Fitch, is that if a comparison is made for each of the 16 leading banks of the levels of their equity and loan-loss reserves against their portfolio of NPLs and special mention loans, then in every case the latter "swamped reserves, while for many banks equity also was severely affected". And these banks are the largest and healthiest in the country, adds Fitch.

In a sign that some of the lending is already reaching infrastructure and real estate projects China's National Statistics Bureau said on Monday that spending on property development was up from a year earlier by 4.1% in the first quarter, following a rise of only 1% in January and February. Property sales were also up year on year (by 8.2%) in the first quarter, after sliding in January and February. However urban real estate prices in 70 major cities were down 1.3% in March, compared with March 2008, confirming the general deflationary environment.

Further foreign direct investment into China fell for a sixth month in March, dropping 9.5 percent from a year earlier to $8.4 billion, as compared with a 15.8 percent decline in February. For the first quarter as a whole, spending fell 20.6 percent to $21.8 billion. Foreign-invested businesses account for 30 percent of industrial output, 55 percent of trade and 11 percent of urban jobs according to Commerce Ministry spokesman Yao Jian at the press conference where the FDI data were released. The rate of decline in FDI is slowing however, since while this is the first time since 2000 that investment from abroad has fallen for six straight months, the absolute value of investment in March was the largest in nine months and the decline from a year earlier was the smallest in the last three months. Thus it would be premature to draw any definitive conclusions at this point.

And just one more data point to add to all those quandrys, China’s March power output fell about 2 percent from a year earlier according to an official from the China Electricity Council, citing preliminary data. The drop is smaller than in previous months, the official said today, declining to be named before the official data release.

Power production fell 3.7 percent in the first two months from a year earlier, the National Bureau of Statistics said on March 12. Further, China's power output fell 0.7 percent in March from a year earlier, according to Caijing magazine on April 3, citing the State Grid Corp. of China, the country’s biggest electricity distributor. On the other hand China Central Television reported on April 11, citing the Electricity Council, that electricity use was up “noticeably” in March from February. Now this little snippet of information would appear at first sight to be at variance (but not in contradiction) with the March year on year data, until you consider the sort of seasonal influences we have been encountering in this post. So it is quite possible that power consumption was up sharply month on month, and down slightly year on year. What seems hard to understand, at least from where I am sitting, is how power consumption can have fallen while industrial output surges 8.3%. When you put this together with the import data, and the rising surplus, then something quite simply doesn't add up here.

This impression that all may not be moving as planned under the "official version" would seem to find some confirmation in the latest reports that the Chinese government is considering additional stimulus measures to boost consumption and bolster growth. According to a report in the official China Securities Journal - citing Gao Huiqing, a researcher at the State Information Center - the government will issue some “guideline” policies and continue to use fiscal and taxation measures to spur an expansion. This follows this weekends statement from Premier Wen Jiabao that China would “closely” monitor changes in the domestic and world economy and “hammer out” new response plans when needed.

Gao, who is affiliated with the National Development and Reform Commission, indicated that the kind of recovery mentioned by Premier Wen, spurred as it is by rebounding inventories and sales of property and cars, may be short-lived without a global rebound which will increase demand for Chinese exports.

“While the stimulus is indeed having an effect on loan growth and some measures of economic activity, the trend decline in exports is unbroken,” said James McCormack, head of Asia sovereign ratings at Fitch Ratings in Hong Kong. “Chinese gross domestic product growth will remain below potential until the global economy recovers.”

Indeed according to Zheng Xinli, the deputy policy research head of the Chinese Communist Party, China’s 2009 exports may shrink by as much 10 percent over 2008. So what we have here, is more like a make and mend, hold the line, stimulus approach, as the government tries to soften the external blow, rather than a full blooded, domestic demand driven recovery.

According to initial reports the new package is likely to be focused on social welfare spending and on boosting consumer consumption, both of which are to be fuelled by the record fiscal deficit China is expected to run this year. China is, for example, subsidizing 20 billion yuan this year on rural purchases of televisions and refrigerators and plans to increase spending on welfare by 29 percent. In the long term, the government is also planning an expanded social safety net, and the State Council published earlier this month an 850 billion yuan health-care plan, including building at least one hospital in every county and expanding medical insurance coverage to 90 percent of the 1.3 billion population by 2011. All welcome measures, but not surely the ones which will lead us all collectively away from the abyss.

Prices Drop As Exports Fall

2009-03-11T17:31:00.009+01:00

Perhaps one of the most heated debates which is taking place among investors and economists at the present time relates to China. Economic growth plunged in the fourth quarter of last year, and the economy may even have contracted. Yet the government has lashed out "loads of money" on a huge stimulus programme. Will this work? The Jury is still out.

Certainly some sectors of the economy are suffering badly and China’s trade surplus plunged in February on the back of a record drop in exports. The trade gap narrowed to $4.8 billion - roughly one eighth of the amount registered in January, according to data from the customs bureau. China's trade surplus hit a record $40 billion in November. Exports dropped sharply in February - down 25.7 percent from a year earlier (following a 17.5% fall in January), while the collapse in imports slowed, falling by "only" 24.1 percent following January's record 43.1 percent decline.

Meanwhile China announced earlier this week that its consumer inflation fell for the first time in more than six years in February, suggesting we might now be entering a period of price deflation - the consumer price index fell 1.6 per cent from a year earlier in February. This followed a 1.0 per cent rise in January .

China's CPI last fell in December 2002, when it dropped 0.4 per cent, capping a year in which CPI fell every month save one. The latest data show the risks of prolonged general price declines - deflation - are rising. Beijing has targeted headline inflation of 4 per cent this year but it certainly now looks like the government will struggle to get prices back into positive territory and may have to confront a prolonged period of deflation. Food prices, a key component of in the Chinese CPI, fell 1.9 per cent in February from a year earlier; non-food prices fell 1.2 per cent.

And more evidence of possible deflation in the works comes from wholesale prices, since the producer price index fell 4.5 per cent in February from a year earlier, a steeper drop than January's 3.3 per cent decline.

Industrial Output Falls Back

China’s industrial-production growth slowed at the start of the year on the back of the export decline, with output rising only 3.8 percent in January and February from a year earlier, slowing from a 5.7 percent increase in December.

However China’s investment spending has maintained its momentum (and even increased), as the government pours money into roads, railways and power grids. Urban fixed-asset investment climbed by 26.5 percent in January and February from a year earlier.

Retail sales, on the other hand, have been slowing, and rose by 15.2 percent in February from a year earlier in current price terms (after a 19 percent rise in December) or by 16.8% in real (price adjusted) terms (given that prices fell year on year). The downward momentum in retail sales growth since the summer is evident on both measures.

Huge Loan Expansion

So the big question is to just what extent will the government investment programme help restructure the economy? Certainly it won't kickstart it, since the export sector is dependent on demand elsewhere, and that is unlikely to move in the near tyerm. However the emphasis in Chinese economic activity might be able to switch towards domestic consumption, and that is the big question we now face. Certainly bank lending has increased, with China’s new loans more than quadrupling in February (from a year earlier) as the government pressed banks to support a 4 trillion yuan $585 billion). The problem is, just how much of this lending can turn bad?

Banks extended 1.07 trillion yuan of local-currency loans in February and M2 climbed 20.5 percent from a year earlier, the fastest pace in more than five years, after growing 18.8 percent in January. The lending, which is in addition to a record 1.62 trillion yuan in new loans in January has given rise to concerns that the pace of new lending may be unsustainable and endanger the overall health of the financial system. Lax credit assessment now may lead to an upward surge in delinquencies in the months and years to come.”

Central bank Governor Zhou Xiaochuan said earlier this month that loans and money supply may have grown too quickly, since Premier Wen Jiabao announced a whole year target for lending of 5 trillion yuan, so that the banks are already halfway through their target with 10 months still to go. The surge in credit has also triggered concern that some of the money is being pumped into the stock market. The Shanghai Composite Index which tracks China’s largest stock exchanges is now up by 17 percent since the start of the year.

The worries about bad debts are being taken seriously, and China’s banking regulator have told banks to boost provisions to 150 percent of their outstanding non-performing loans, according to an article in the 21st Century Business Herald. The bad loan ratios of the country's five biggest banks -- Industrial & Commercial Bank of China Ltd., Agricultural Bank of China, China Construction Bank Corp., Bank of China Ltd., and Bank of Communications Ltd., is to be raised to 150 percent from 130 percent at the end of 2008, while the requirement for smaller national banks remains unchanged at 150 percent.

Liu Mingkang, chairman of the China Banking Regulatory Commission, has described such moves as "prudent", and in line with the regulatory decision to carry out spot checks on bank loan books to “ensure quality of growth”.

Rural Squeeze

But while the banks dole out the money, and stocks surge, China’s rural population are feeling the pinch as farm incomes drop this year on the back of falling agricultural prices.

“The pressure from declining agricultural prices is high,” Yin Chengjie, vice chairman of agricultural and rural affairs of the National People’s Congress, said in an interview in Beijing. “We cannot be optimistic about growth” in farm incomes this year, he said.

Prices of agricultural products - including cotton, soybeans and corn have fallen over the past year as bumper harvests swelled stocks and restaurant sales and food processing output declined. The net consequence is that the disparity between the urban and rural population is widening, and the situation is further aggravated by the large number of migrant workers who now find themselves unemployed and have returned to their villages.

And just to show that the export data isn't simply a one off problem, it is worth noting that the OECD leading indicators reading has been sliding steadily for months now, and continue on its way down in January regardless (see chart below). Also foreign direct investment in China fell for a fifth consecutive month in February.
Investment dropped 15.8 percent to $5.83 billion from a year earlier - according to the commerce ministry - compared with a 32.6 percent decline in January. So the stimulus programme is acting as a brake on the rate of decline, but we still have a decline. That, I think, is the best we can hop for at this point.

Exports Tumble As China Enters Deflation

2009-02-12T09:35:00.005+01:00

Is China about to lead the charge out of the current slump, or is the Chinese economy about to succumb to it? This appears to be one of the most interesting and most hotly debated questions of the moment. On the one hand the latest manufacturers PurchasingManufacturers Index seemed to suggest the contraction in China's economy slowed in January, while other data, in particular producer price inflation, loan growth, employment figures and movements in external trade seem to give a rather different impression.

External Trade Drops Sharply

China’s exports fell at the fastest rate in almost 13 years in January while imports fell completely off the cliff, plunging at the record rate of 43.1% year on year, indicating that the contraction in the world’s third-biggest economy may well be gathering rather than losing pace. Exports were down by 17.5 percent from January 2008.

Due to the massive fall in imports China's trade surplus remained high - at $39.11 billion it was the second largest on record - and this is almost guaranteed to add to tensions as global leaders seek to avoid a return to protectionism. China’s economic slowdown has already cost the jobs of 20 million migrant workers and the economy is now almost certainly contracting, rather than, as some argue, simply slowing.

Exports to the European Union fell 17.4 percent, while those to the U.S. were down 9.8 percent. Shipments of electronics goods dropped 21 percent. Steel slid 32.5 percent and toys declined 14.7 percent, although the numbers are possibly exacerbated by the week-long Lunar New Year holiday, which took place in January this year as opposed to February last year.

Chinese government researchers have already begun to advocate weakening the yuan against the dollar to support exports, and according to a report from the Ministry of Finance’s research institute published earlier this month China should “actively guide” the yuan to about 6.93 to the dollar to aid growth and boost employment, although there is no indication at this point that such a recommendation will be acted on.

It is very hard to know what is the actual present condition of the Chinese economy, since while it grew by 6.8 percent from a year earlier in the fourth quarter of last year - following a 9 percent in Q3 - this data point doesn't actually tell us too much about the current rate of expansion/contraction, and since things are changing very quickly this is quite important. The same goes for the official industrial output numbers which tell us output was up at a 5.7 percent annual rate in December, down from 17.4 percent a year earlier, but don't tell us what happened between November and December.

China Compared With The Other Asian Exporters

Some commentators are arguing that the drop in Chinese exports is not that severe if we compare it with the decline in other Asian countries, suggesting in effect that China is less export dependent than some of its neighbours.

“While the recent export slowdown has been alarming, China’s export slump has not been as severe as in some neighboring countries with a greater reliance on high-tech exports,” said Jing Ulrich, head of China equities with JPMorgan in Hong Kong. Taiwan’s exports fell a record 44 percent in January.

But this view seems to me to be misleading, and possibly ill-founded. According to a recent research report from DBS, two things stand out in the latest data. First, China’s exports to the US have obviously fallen considerably. In fact, they have fallen by around 9% since October (USD terms, sa, 3mma). Exports to Europe have also fallen by a similar amount. But Asia’s exports to China have fallen by four times more - or 37%. If China were simply passing along weak demand from the US and Europe to its neighbors, the drop in Asia’s exports to China ought to be roughly proportionate. So obviously they’re not.

DBS suggest that there is thus a huge disconnect between the fall in global demand for China’s exports and China’s demand for Asian exports.

Secondly , China’s demand for Asian exports starts to drop sharply in August, fully three months before China’s exports themselves begin to drop. A number of interpretations are possible at this point. One possibility is that the decline in other parts of Asia reflected a decline in new orders which only later hits China (in which case we should expect China's exports to take much stronger hits in February and March). Another is that China was the “leader”, not the“follower”, with much of the Asian exports being directed to fuelling China's internal investment boom. There is a third possibility here, and that is since China is very energy dependent, a significant share in the imports drop is a reflection of the fall in energy prices, since oil did, conveniently, peak in July 2008.

Possibly there is some truth in all these arguments, but, in terms of quantities and in terms of timing, there does seem to be something “autonomous”going on with Chinese demand. And if its not simply about the drop in demand from the US, what is it about?

Could the end of the Olympics bubble have something to do with the disconnect, and with the subsequent bust in Asian exports? It certainly seems to be more than a coincidence that China’s imports from Asia rise sharply in the run-up tothe August Olympics and then fall sharply immediately thereafter.

Price Changes Hit Deflation Territory

Prices in China have now started to fall, with producer prices dropping in January by 3.3 percent -the most in almost seven years. Consumer prices rose 1 percent in January from a year earlier, after gaining 1.2 percent in December, but these are year on year numbers, and the recent decline in month on month prices changes, despite a surge in food prices as we entered the Lunar New Year celebrations, have generally moved into negative territory.

In particular, food prices are usually higher during the Chinese new year celebrations and for that reason consumer prices were probably higher than usual in January. Despite inflation declining less than expected in January, there are signs that inflationary pressure is easing fast and it is likely that China will enter deflationary territory in the coming months. Inflation excluding food in January plunged from 0.6% year on year to -0.6% (see chart below).

The residential component showed an unexpected large drop from 1.1% year on year to minus 2.3%. Besides food - which is running just below 5% year on year - all the other major components are now in negative territory.

“Inflation could have been close to zero or worse if not for the Chinese New Year, because vegetable prices and grain prices went up,” said Wang Tao, China economist at UBS AG in Beijing.

McDonalds, the world’s largest fast-food chain, said last week that it was cutting the prices on some of its meals in China by as much as one-third to attract customers to its 1,050 restaurants across the country.

So my feeling is that we have now entered a deflationary period in China, of longer or shorter duration depending on whether or now the authorities are successful in turning the economy around. The rate of price deflation, and in particular in producer prices, will certainly give us one convenient indicator of the rate of contraction. Further, the inflation slowdown will put additional pressure on the central bank to cut interest rates, since the key one-year lending rates still stands at 5.31 percent - following a total of 2.16 percentage points in reductions at the end of 2008 following the collapse of Lehman Brothers. The central bank has not yet cut rates so far this year, despite the fact that with inflation now around zero, and the economy more than likely contracting, those 5 percentage points represent very tight monetary conditions. Of course, and looked at from another perspective, any further loosening in interest rates may well not be all that positive for the yuan.

Mind What You Say

During the lunar new year festival Chinese people send traditional greetings to each other, such as "Caiyuan gungun" (May prosperity come rolling to you) or "Xinxiang shicheng" (May you achieve all your desires). This year, festive well-wishers have had to be careful which salutations they choose. “Caiyuan gungun” has been virtually banned because it sounds exactly the same as the phrase meaning “laid off and discarded”. “Xinxiang shicheng” is also out of favour because it sounds suspiciously like the Chinese for “40 per cent pay cut”.

Giant Credit Surge In January

The Chinese government has now abandoned quotas for new credit growth and has urged state-owned commercial banks to offer finance for the Rmb 4,000bn ($586bn) fiscal spending plan which is due to run over the next two years. As a result there are now plenty of signs of monetary losening, among which is the fact that new loans rose at a record pace in January while the money supply expanded at the fastest pace in more than a year. Banks extended Rmb 1,620 bn of new local-currency loans and M2 climbed 18.8 percent from a year earlier. The new lending was equivalent in size to 40 percent of the proposed stimulus spending.

“Explosive lending growth is unsustainable and will likely decelerate,” said Ha Jiming, Hong Kong-based chief economist at China International Corp. “China may face increased risks going forward if the lending upsurge is coupled with declining loan quality and loosened lending terms.”

The biggest proportion of new lending, 39 percent, was through discounted bills, which could be though of as supplying working capital, rather than funding investment. Medium and long-term corporate loans accounted for 32 percent.

Also of note, consumer credit grew by 121bn in January, and this was almost evenly divided between short and long term credit. These together accounted for just 7% of total credit growth. The level of consumer credit growth was the largest in just over a year, but it was not far above the levels prevailing in 2007. Consumer demand in the holiday month should have been particularly strong in relation to the rest ofthe year, so this rather mediocre result suggest a weakness in the underlying dynamic of consumption growth that could become more apparent as the year progresses.

China Is At The Start, Not The Finish, Of The Slowdown

At this point in time it would seem highly premature to start speculating that China's economy may be turning the corner. Many have read the lates CLSA PMI survey, which showed the output index rose in January to 39.7 from 38.6 (which had been a record low) in December, as signs of turning the corner. New orders were even up to 39.9 from 37, while the export orders component rose to 36.3 from 33.6. So the situation was better in January than December, but it is SO important to remember that these sub-components all indicate ongoing contraction, and it is very, very early to start saying that all this has "bottomed".

The collapse of China’s export engine has obviously hit the most vulnerable first, and the Chinese authorities estimate that 20m of an estimated 130m rural migrant workers in China's industrial sector have lost their jobs and returned to home towns and villages. The implied 15.3 per cent unemployment rate among migrants is not captured in official jobless numbers, which measure only urban workers who register as unemployed. That official number rose to 8.86m people, or 4.2 per cent of the urban workforce, in December, but many specialists say this number vastly underestimates the true scale of the problem.

And in this environment it is hard to see the "big switch" to a consumption driven economy moving slowly, if indeed it moves at all.

China's Manufacturing Sector Continued To Contract In January

2009-02-02T08:56:00.007+01:00

China’s manufacturing contracted for a sixth consecutive month in January as shrinking global demand hit the country's export-driven economy. The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 42.2 from 41.2 in December. Since any reading below 50 indicates contraction, even though the rate of contraction dropped (and has been dropping since November, see chart below) China's manufacturing sector (and hence China's economy) is still contracting. What we don't know at this point is how quickly China GDP is contracting, we won't know that till someone with the time and ingenuity devises a way to calculate a rough and ready quarter on quarter (seasonally adjusted) output indicator. Come on, be famous for a day, go out and do it (since the Chinese statistics office apparently have no interest in the matter), I would, but I simply don't have the time, since Europe, not China, is my focus. However, on a rough and ready, back of the envelope, basis my guess is that this months Chinese reading may be equivalent to something like a quarter on quarter contraction rate of around 0.5%, which means that what we have at this point is a 2% annual contraction rate, but we really need to see some actual data to calibrate all this a bit better I think.

In the CLSA survey, output index rose to 39.7 from 38.6 (which had been a record low) in December. New orders were up to 39.9 from 37. The index of export orders rose to 36.3 from 33.6. So the situation was better in January than December, but it is SO important to remember that these sub-components all indicate ongoing contraction.

My guess is that Chinese companies are squeezing costs and margins as far as the lemon will take it, since there is little evidence of any uptick in aggregate global demand for manufactured products, au contraire. My guess is also that they are grabbing market share by entering the supply chain in places they haven't been before. For example, Hafei Aviation Industry Co., China’s second-largest listed aerospace company, surged to its highest level in almost six months in Shanghai trading this morning after the announcement that it had formed a venture to supply composite-material components to Airbus SAS.

Airbus plans to give 5 percent of the work making parts for A350 airframes to Chinese companies in a bid to win market share in the world’s second-biggest aviation market. The planemaker has also opened an aircraft assembly line in China, its first outside of Europe.

Harbin Hafei will start production in September, and it plans to open a new plant by the end of 2010, Airbus said. Hafei, Avichina Industry & Technology Co. and Harbin Development Zone Heli Infrastructure Development Co. will each hold 10 percent of the venture. Harbin Aircraft Industry Group Co. will own a 50 percent stake. Airbus will have a 20 percent stake.

Unemployment Surges Dramatically

Chinese manufacturers also shed jobs last month at the fastest pace since the survey began in 2004, with the employment index falling to a record low of 45, so obviously as workers lose their jobs internal consumption is also affected, and we clearly have worse to come in the immediate future.

Chen Xiwen, a senior rural planning official, estimated that about 20 million migrant workers had lost their jobs because of the nation’s economic slowdown at a press briefing in Beijing today.

More than 20m rural migrant workers in China have lost their jobs and returned home as a result of the global economic crisis according to government figures, raising the spectre of widespread unrest in the authoritarian country. By the start of the Chinese New Year Spring Festival on 25 January, 15.3 per cent of China’s 130m migrant workers had lost their jobs and returned from manufacturing centres in the south and east of the country to their home villages or towns, according to Chen Xiwen, Director of the Office of Central Rural Work Leading Group, who was quoting a survey from the Ministry of Agriculture.
Government figures show that in recent years 6m to 7m new rural migrant workers a year have poured out of the countryside to fill the factories, construction sites and restaurants of the booming cities, which means the government must actually deal with as many as 27m new jobless in the countryside. On top of that, a survey by a government think-tank in December estimated 1.5m recent tertiary graduates in China were unable to find work by the end of November and universities and technical colleges are expected to churn out another 6.5m graduates this year. According to rough official calculations one percentage point of Chinese GDP growth creates around 1m jobs.

Chinese Premier Wen explicitly declined to rule out a devaluation of the yuan in an interview with the Financial Times today, although , he said that for the moment the government was content to keep the currency stable at what he considered to be a balanced and reasonable level.

Asked if China bore any responsibility for causing the financial crisis, as a number of economists believe, he stiffens and says in a low voice: “It is a ridiculous view.” But he makes it clear that Beijing will do whatever is needed to maintain growth at “about 8 per cent” this year. “Running our own affairs well is our biggest contribution to mankind,” he says. If necessary, some of the country’s huge stash of foreign currency reserves could be put towards this endeavour – a new plan to enable the use of reserves for domestic purposes is under discussion, he says.
“We must take forceful steps. Under special circumstances, necessary and extraordinary measures are required,” he says. “We should not be restricted by conventions. Success or failure depends on the pace and intensity of those measures.”
Mr Wen refuses to make an explicit commitment not to devalue the Chinese currency during the crisis – as the government did after the Asian financial crisis in 1997, a pledge that helped engineer the eventual recovery and won China a lot of prestige. But he does rule out any big shifts in the value of the Chinese currency.
“I want to make it very clear that maintaining the stability of the renminbi at a balanced and reasonable level is not only in the interests of China but also the interests of the world,” he says. “Many people have not yet come to see this point that if we have drastic fluctuation in the exchange rate of the renminbi, it would be a big disaster.”

The yuan fell 0.1 percent to 6.8471 against the dollar as of 12:23 p.m. in Shanghai today, a drop which is largely a by-product of the fall in the euro against USD.

China Nears Recession Point As GDP Slumps

2009-01-22T07:48:00.006+01:00

China’s National Bureau of Statistics released fourth quarter GDP growth statistics for 2008 today, and it turns out that (according to their initial estimates) the Chinese economy expanded by 6.8 per cent in the last quarter of the year when compared with the same period in 2007. This was the weakest quarterly year on year growth rate in seven years. For the year as a whole, the economy grew 9 per cent, down from the revised 13 per cent growth rate in 2007.

Strikingly, Japanese exports to the US were down some 37% yoy, losing some 26pp since the 11% yoy contraction in July. But we cannot highlight strongly enough how truly mindboggling Japan’s collapse in exports to China are. Last July they were expanding at a 16% yoy pace. Now they are contracting at a 35% yoy rate! This is a phenomenon throughout the region. Hence despite the notoriously manipulated Chinese GDP data showing a shocking slowdown in GDP growth to 6.8% yoy, I would eat my hat if the Chinese economy was doing anything other than contracting right now. Albert Edwards Societe Generale

The steepness of this slowdown is likely to have a significant impact on much of the rest of Asia, which relies heavily on demand from China. Only this week a Singapore based economist friend of mine sent me this in an e-mail:

At S'pore's port container terminal (the busiest in the world), a third of the cranes are idle. There are some companies saying they have inventories stretching 6 months out. December's plunge in Asian exports was due to the shutdown of electronic companies during the Christmas period because of the pile up in inventories.

Basically there is still far to much we don't know about what is happening in China, like, for example, the seasonally adjusted quarter on quarter rate. Barclays Capital economist Peng Wensheng estimates that after taking into account seasonal adjustments, the Chinese economy barely grew at all in the fourth quarter compared with the third quarter. My feeling is that he is most probably right. Most of the consenus analysts are therefore very probably well behind the curve. Like Daiwa Institute of Research, JPMorgan Chase & Co. and Citigroup Inc. who while they all today reduced their estimates for China’s growth in 2009 remained at remarkably high levels. Daiwa cut to 6.3 percent from 7.5 percent; JPMorgan to 7.2 percent from 7.8 percent; and Citigroup to 7.6 percent from 8.2 percent. This seems to me to be the next best thing to living in "cloud cuckoo land".

Basically it seems to me that few people other than professional macro economists and bank analysts (and far from all of these if the truth be told) really realise what the implications of such a dramatic decline in year on year GDP actually means. If the quarter on quarter rate of expansion was very low indeed, possibly verging on the negative then - guessing a bit, you know what they call back of the envelope stuff - this means output must have been moving in the October-December period somewhere in an annualised 0 to 2% range. This means we may well see quarter on quarter negative growth in 2009 in China, and that the possibility of a technical recession of two consecutive quarters of negative growth must be over 50% at this point. It wasn't so long ago that the consensus was saying that annual GDP growth which was as high as 6% would be tantamount to a recession!

It is really very frustrating to find that with all the trillions of dollars at issue, and a whole army of China watchers, virtually no one seems to be trying to derive monthly and quarterly rates of movement from the official statistics.

The OECD do at least seem to be aware of this problem and they do have a lead indicator for China (which includes items like cargo handled at ports, Enterprise deposits, Chemical fertilizer production, Non ferrous metal production, a Monetary aggregate M2, and Imports from Asia. Below I have a chart which compares this indicator for both Spain and China. Since Spain, as we know, is having a very strong contraction at this moment in time, it gives some sort of reference point. What is so striking is that it appears China is now slowing much more rapidly than even Spain, and GDP may, looking at the steepness of the recent month on month drops,have even started contracting in November. This is obviously all shell shock stuff.

Societe Generale economist Albert Edwards is one of those who has been drawing our attention to the rapid decline in China's GDP (although I myself had a go here) and he uses one very interesting "proxy" (an indicator which can serve as a rough and ready substitute for something else, in this case movement in GDP) - electricity output. If you look at the 3 month year-on-year moving average for electricity output in China (see chart below) you will see it is already falling, which means that (in all probability) China's GDP is falling, which is just wow!

The history of using electrical output as a convenient proxy where we simply don't have very adequate data has a long and reputable history - going back to the pioneering work of US growth theorist Edward Dennison in the 1960s - but in case you feel that the correlation may not be a good one, here (see below) is a chart from Edwards which shows China GDP and electricity output compared. The fit is obviously not a perfect one, but that isn't the name of the game here, what should be evident is that a drop in electrical output as large as the one we are seeing in China at this point will be reflected in a very sharp reduction in GDP output.

Which takes me on to my next point, how reliable is Chinese data? Well, perhaps I am going to surprise some of you here, but I would day that for my purposes it doesn't really matter, since what I think we need to know is the rate of contraction (or expansion) in Chinese GDP, and not its absolute level. What matters to the rest of the world is not expecially how rich - or poor - China actually is (from a macro economic analysis point of view that is), but how rapidly it is expanding - or contracting - and what the rate of export and reserves growth is. The rest is interesting, but from a nuts and bolts point of view, it constitutes what Boris Vian used to call froth on the daydream. If the official data is rather inaccurate, then it is not unreasonable to assume that the inbuilt biases are the same from one time period to the next (the same point applies to the existence of the so called "informal economy"), and so my message here is - arrived at on the basis of looking at one economy after another in rapid succession - how much we can learn from how little, if only we know what we are looking for that is. This electrical output picture is also to some extent confirmed by China's manufacturing purchasing managers index, which has been contracting for some months now, and to an extent which begins to be compatible with GDP contraction, given the dependence of China on manufacturing activity.

Well China isn't quite in Great Depression mode yet, but manufacturing activity - which forms the core of the Chinese economy and accounts for 43% of all activity - is already very close to a technical recession, and phew, it wasn't very long ago that the Chinese economy was registering double digit growth. So the turn around is gigantic. The "close to technical recession in manufacturing industry" call comes from the people over at CLSA Asia-Pacific Markets, who compile the China purchasing managers index, and they base their judgement on the fact that their Chinese manufacturing index has now been registering contraction for five consecutive months.

Export Slump

China is an export driven economy, and you can't simply switch from external to internal demand as a driver at the click of a finger (or mouse, if you make your financial transactions online). Another economist who mailed me this morning said this:

"I don't cover China so unfortunately, my views on that country are not very informed, but I do agree with your point about the China internal consumption argument. In my opinion, the belief that domestic consumption will take over from exports as a growth engine is nothing more than myth. Perhaps I'm misunderstanding the argument, but when factories and the export sector, in general, are bleeding jobs, it would be rather odd for internal consumption to take off at this point in time."

So what is happening to exports? Well, China’s exports fell the most in nearly a decade in December, with shipments down by 2.8 percent over December 2007. That compares with a 21.7 percent increase a year earlier. Over the whole of 2008 exports were up by 17.2 percent, a reduction on the 25.7 percent gain registered in 2007, and suggesting that the drop in the last two months of the year may have been very sharp indeed. Exports to the European Union, China’s biggest export market, fell 3.5 percent in December from a year earlier. Shipments to the U.S. dropped 4.1 percent. Imports dropped even more sharply - by 21.3 percent, meaning the trade surplus failed to fall, and at $39 billion it remained the second-biggest on record.

And China's declining imports are also being felt elsewhere, since in Japan's December trade report (which was out this morning, and was a complete horror story) we find that exports to China were down 35.5 percent year on year.

So to some up, while it may well be true that China is not (yet) entering the Second Great Depression, I am arguing that China is really going to be one of the worst case scenarios in the current global recession, and that consensus thinking still has a very very long way to go in catching up with events in the China case.

The Second Great Depression Wends Its Way Forward in December

2009-01-02T16:17:00.002+01:00

And lands in China.

Well China isn't quite in Great Depression mode yet, but manufacturing activity - which forms the core of the Chinese economy and accounts for 43% of all activity - is already very close to a technical recession, and phew, it wasn't very long ago that the Chinese economy was registering double digit growth. So the turn around is gigantic. The "close to technical recession in manufacturing industry" call comes from the people over at CLSA Asia-Pacific Markets, who compile the China purchasing managers index, and they base their judgement on the fact that their Chinese manufacturing index has now been registering contraction for five consecutive months.

Now for those of you who are new to the world of Purchasing Manager's Indexes (PMIs), welcome. Basically these indexes are very useful, since they give you a "just in time" point of reference to tell you what is actually happening. These are composite indexes - measuring things like current output, new orders (both domestic and export), employment and input prices. They are not perfect, but they are reasonably accurate - the fit which you can get between composite PMIs (manufacturing and services combined) and GDP is often attractively good - and in a country like China where the main data we get is year-on-year (which in a critical moment of rapid change like this one is virtually useless) it is very hard to see what is happening. The Shanghai-based Industrial Bank estimate, for example, that GDP growth in China will be 5.6% in Q4 2008. But what does that data point - if accurate - tell us? That the economy is slowing fast, well we already knew that. But just how fast? Well GDP was 9% in Q3 - down from 10.1% in Q2. So the deceleration is very rapid, but did the Chinese economy actually manage to contract in Q4? I doubt it, but it may do in Q1 2009, although the only way we would really know would be if the National Statistics Office published quarter-on-quarter seasonally adjusted numbers, which as far as I can see they don't. Indeed only a small group of highly developed economies actually take the trouble to do this, and you don't even find all EU member countries doing it yet, although Eurostat (thank god for Eurostat) do require such data from members (but those of you who ever get round to checking will see there are still blanks for some countries in the Eurostat quarterly releases).

Hence you can see why, in the case of somewhere like China, the PMIs are very, very useful, for those of us who would like to try and follow what is happening as it actually happens.

As for the PMI itself, China’s composite manufacturing index contracted for the fifth consecutive month in December as recessions in the U.S., Europe and Japan bit deep into demand for exports - indeed China's exports fell year on year for the first time in seven years in November. The CLSA China Purchasing Managers’ Index registered a seasonally adjusted 41.2, compared with a record low of 40.9 in November. On such indexes any reading below 50 reflects a contraction.

Despite the apparent small improvement in December the current output index actually fell sharply, and was down to a record low of 38.6 from 39.2 in November, so production was falling, and the index was basically nudged up slightly by other factors, such as the measure of new orders which rebounded to 37 from 36.1, driven by a rise in export orders to 33.6 from a horrific 28.2 in November. However, according to the report, Chinese manufacturers reduced the size of their workforces at a series record in December, and the employment index has now contracted for five consecutive months, to hit 45.2 in December.

So where exactly are we? Well we aren't (quite) in the Second Great Depression yet, but the situation is deteriorating, and rapidly. Manufacturing output is now contracting at quite a sharp pace, while it was rising in the first half of the year at something like a 15% year on year rate. In a useful summary of the Chinese situation back in November, Nouriel Roubini defined a hard landing in China - which he felt was coming - as follows:

There is thus now a growing risk of a hard landing in China. Let us be clear what we mean by hard landing. In a country with the potential growth of China, a hard landing would occur if the growth rate of the economy were to slow down to 5-6% as China needs a growth rate of 9-10% to absorb about 24 million folks joining the labor force every year; it needs a growth rate of 9-10% to move every year about 12-14 million poor rural farmers to the modern industrial/manufacturing urban sector.

This is more or less the consensus view of what we used to think a hard landing would mean in China, but I think the latest data already take us beyond that. I think there is now a real risk of a technical recession in the more or less classic sense of two consecutive quarters of negative growth (let's say that the risk is 50-50 at this point), and of serious economic and financial dislocation following in the train of this (btw, just how quickly can you burn your way through $1.7 trillion in reserves, it will be an interesting experiment I think).

Brad Setser (further down the same link) has long been more cautious on China, being sceptical about the impact of a dramatic slowdown in exports (and even more importantly in export oriented investment) on an export driven economy, but those of us who have been closely watching other export dependent economies like Germany and Japan over the last decade and a half were surely not quite so sceptical. However even Brad himself is clear that the possibility of an export downturn feeding its way back into the domestic economy - via some sort of negative feedback process - is real enough:

But the real key to forecasting China’s future growth consequently is determining whether domestic consumption and above all investment will continue to grow strongly in the absence of strong export demand. Remember, over the past few years both domestic investment and exports increased rapidly. If they fall together as well, Chinese growth will slow quite significantly. And unfortunately the latest indicators seem to suggest that they are correlated; consequently domestic demand may fall along with exports.

The $1.7 trillion question is, then, just why China is so export dependent? Doubtless there are many factors at work, but one of these is, I am almost sure, China's very special demographics (30 years of one child per familiy policy), and the special problems that these present in the context of building a sustainable national pensions system at the same time as the population pyramid inverts. Obviously the absence of a credible pension system has to be one of the factors influencing the strong desire to save which we are seeing in China. Economics Nobel Franco Modigliani also thought this, and specifically addressed the Chinese saving puzzle in his last published paper:

China's per capita income ranks below 100th in the world. Its saving rate, however, has been one of the highest worldwide in recent decades. In this paper, we attempt to explain the seeming paradox within the framework of the Life-Cycle Hypothesis developed by Franco Modigliani. The key LCH variables are income and population growth. Our results based on data we put together from official sources show that income growth has been the dominant factor behind the dramatic increase in China's saving rate, as predicted by the LCH. Demographic structure and inflation also had significant impact on the fluctuations of the saving rate.
The Chinese Saving Puzzle and the Life-Cycle Hypothesis - Franco Modigliani and Shi Larry Cao

By Way Of Brief Conclusion

Well basically, the conclusion here is that there is no conclusion, at this point at least. But I would draw attention to two potential points of interest for all you "economy watchers".

Firstly, a couple of months back my fellow blogger Doug Muir drew our attention to a very interesting point being made by US economic historian Scott Reynolds Nelson:

As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.

At the time of reading this I thought to myself hmmmm! This isn't that simple, but he is on to something. Basically I think no two (or does that make it now three) Great Depressions are ever really exactly alike. I certainly think the resemblence between what is going on now and what happened between 1929 and 1933 is more than passing (especially for the sequencing, of which more in another post), but evidently there are elements of the 1873 one too, and Scott Reynolds puts his finger on some of them, especially in the context of surplus to requirement investment and large capacity overhangs. So my best guess is that what we have is a hybrid, and that what is now happening in China is the best example of the underlying dynamics behind that other great depression that hit our grand- (or great grand) parents and that may well be now about to come back to hit us, boomerang style.

Which brings me to my second point, the Smoot-Hawley Tariff Act, which, as wikipedia explain, was signed into law on June 17, 1930, and raised U.S. tariffs on over 20,000 imported goods to record levels. After the act was passed, many other countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half. Many economists now regard the Smoot-Hawley Act as having been the principal feedback catalyst for the severe reduction in U.S.-European trade, and which took it from the 1929 high down to the depressed levels of 1932 and which thus accompanied the start of the Great Depression. And here, in the spectre of a repeat performance comes just the danger we face in the wake of the dramatic contraction which is now underway in China.

It is my personal guess that the first major issue to face Barack Obama as President of the United States may well be what to do about China, and especially what to do about a China which lets - as I now suspect they may well do - the yuan float, in order to see it float DOWN as the economy unwinds. If this does indeed happen then Obama will really have to struggle to hold back the protectionist pressure I think.

China's Manufacturing Contracts Sharply In November

2008-12-01T14:11:00.003+01:00

China’s manufacturing shrank by the most on record and export orders plunged, providing more evidence that recessions in the U.S., Europe and Japan are sharply slowing what was previously the world’s fastest-growing major economy. The Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, according to the China Federation of Logistics and Purchasing. The output index fell to 35.5 from 44.3, while the index of new orders dropped to 32.3 from 41.7. On these indexes any reading below 50 means contraction, and as can be seen in the chart below, China's manufacturing industry has now been contracting (month on month) in four of the last five months. The November reading stands out though, since the magnitude of the contraction has accelerated sharply.

A separate index - the CLSA China Purchasing Managers’ Index - reveals a similar picture, and fell to a seasonally adjusted 40.9 in November from 45.2 in October. The CLSA index, which was started in April 2004, is based on a survey of more than 400 manufacturing companies.

Output, new orders and export orders had record contractions. The output index fell to 39.2 in November from 43.4 in October, while the index of new orders declined to 36.1 from 43.8. The index of export orders dropped to 28.2 from 44.3, CLSA said.

A slump in property sales and building work is also undermining growth. Construction of homes, offices and factories contracted at least 16.6 percent in October after a 32.5 percent expansion a year earlier, according to a report from Macquarie Securities.

The Contraction In Chinese Manufacturing Accelerates In October

2008-11-03T18:54:00.002+01:00

China's manufacturing contracted by the most on record last month as the global financial crisis cut demand for exports, a second survey showed. The CLSA China Purchasing Managers' Index fell to a seasonally adjusted 45.2 in October from 47.7 in September. The output index fell to 43.4 in October from 46.7 in September, while the index of new orders declined to 43.8 from 45.8. The index of export orders dropped to 44.3 from 45.9.

The government-backed China Federation of Logistics purchasing managers' index - published on 1 November - also showed a strong contraction, falling to 44.6 in October, the lowest level since the data began in 2005, from 51.2 in September.

Basically, not only does Chinese manufacturing seem to have been in contraction mode for the last several months now, the rate of contraction seems to be accelerating.

To be watched, and carefully.

China GDP Growth Slows Quite Rapidly In Q3 2008

2008-10-20T08:50:00.006+02:00

China’s economic growth rate slipped into single digits in the third quarter for the first time in at least four years under the impact of the global credit crisis and weakness in the domestic property sector. Annual gross domestic product growth slowed more sharply than expected to 9.0 per cent from 10.1 per cent in the second quarter, the National Bureau of Statistics (NBS) said on Monday.

It was not immediately possible to pinpoint when growth was last weaker because China does not publish new quarterly data when it revises its annual GDP figures. nor was it possible to precisely calibrate the speed of the slowdown since we do not have seasonally adjusted quarter on quarter data. China's economic expansion was the weakest since at least the second quarter of 2003, when growth slumped because of the severe acute respiratory syndrome, or SARS, epidemic.

Industrial production slowed to 11.4 per cent in the year to September, the lowest rate since 2002, suggesting that the economy was losing momentum as the quarter went on. However, the pace of retail sales and fixed-asset investment growth both accelerated last month, beating forecasts and providing reassurance to policy makers counting on domestic demand to take up the slack from ebbing exports.

The property market, which accounts for about a quarter of fixed-asset investment, is in almost in free fall due to tight credit and government curbs. Home sales by volume plunged 55.5 percent and 38.5 percent in Beijing and Shanghai in the first eight months from a year earlier, the official Xinhua News Agency reported, citing the China Real Estate Association. This decline is really still to show its ugly face in the data though, since urban fixed-asset investment climbed 27.6 percent in the first nine months from a year earlier, after a 27.4 percent increase through August, today's data showed.

Retail sales rose 23.2 percent last month from a year earlier, matching the gain in August and close to the fastest pace in at least nine years.

Urban disposable incomes for the first nine months rose 14.7 percent to 11,865 yuan ($1,737) from a year earlier. Rural cash incomes climbed 19.6 percent to 3,971 yuan. Those numbers were boosted by inflation.

The fifth quarter of slowing growth may exacerbate declines this year in iron ore, copper and oil prices and undermine demand for exports within Asia, where economies are already contracting. The cabinet announced yesterday tax cuts for exporters and increased infrastructure investment and the central bank may be poised to cut interest rates for the third time this year.

Steel-product output in China, the world's biggest producer and user of the alloy, fell 5.5 percent in September from a year ago to a seven-month low as weak demand and falling prices forced mills to pare production.

"China's crude steel output fell to 39.6 million tonnes, down 7% from August and 9.1% year-on-year, indicating that many northern mills were cutting production, said market sources. China's steel production ban for the Olympics lasted from July to September 20, so a fall in September output meant that mills were not only not resuming production, but reducing it further in the face of weak demand, said the sources. Several mills in Hebei, China's biggest crude steelmaking province, have been cutting output or have even closed down due to sluggish demand. Some were dumping products in the market in return for cash. September output for major finished products like rebar and plate rose, however, inched up in the month but analysts said this may be due to lower crude steel exports in the month. China exported 7.31 million tonnes of crude steel in September, 1.42 million tonnes or 13.5% less..."

Output was 45.9 million metric tons last month, according to figures provided today by China Mainland Marketing Research Co., which releases data on behalf of National Bureau of Statistics. Production rose 8.1 percent to 445.2 million tons in the first nine months from a year earlier.

Prices of hot-rolled coil, a benchmark product, have fallen to 3,645 yuan a metric ton from a record 5,957 yuan in June. The slump has led to losses at almost all steelmakers, JPMorgan Chase & Co.'s analyst Zhang Feng said recently in a research note.

Export growth may plummet from 22 percent in the first nine months of this year to ``zero or even negative growth'' in 2009, according to Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.

The closure last week of a big toy factory in southern China dramatised the difficulties facing the economy, which have prompted steel and aluminium firms to slash output because of slumping prices. Steel prices in China have fallen about 20 per cent over the past three months and there are reports of small steelmakers being forced to close because of shrinking demand.

Rio Tinto Give China Slowdown Warning

2008-10-15T11:15:00.003+02:00

Rio Tinto’s chief executive, Toma Albanese, warned on Wednesday about the health of China and said the slowdown in one of the world’s fastest growing economies had led the mining company to revise its capital spending plans. Mr Albanese said there had been a marked reduction in Chinese commodity demand from the overheated levels of 2007 and added that the “vast majority of Chinese aluminium producers are now making operating losses.”

As the credit crisis unfolded over the past year, one of the few certainties in the global economy seemed to be China’s ability to plough on regardless at double-digit growth rates. Not any more. With Wall Street in tatters and Europe’s and Japan’s economies faltering, many investors are beginning to ask if China too might stumble badly. After five turbo-charged years of accelerating growth, the Chinese economy is clearly slowing.

Housing Market Evidence of Slowdown

The local government in Shanghai yesterday raised its ceiling on mortgage lending to households under a government-run program, uping available funding by 20 percent in an attempt to encourage families to buy apartments in the city. Eligible households will be allowed to borrow as much as 600,000 yuan ($87,679) starting today, up from 500,000 yuan, the city's public housing fund agency said in a statement yesterday.

Under Shanghai's mortgage program, most households are allowed to spend as much as 7 percent of their monthly salaries to repay loans. Employers must match workers' contributions and borrowers receive preferential bank lending rates. Households meeting certain requirements can spend as much as 15 percent of salaries, and they are the ones eligible for the new ceiling.

The loan program covered 3.42 million people at the end of June, according to the agency. About 8.8 percent of people covered make the larger repayments, the Shanghai Daily said in June, citing the housing agency.

Housing prices in Shanghai, China's biggest financial center, fell 19.5 percent in the third quarter from the previous three months as the volume of sales slumped, real estate broker Savills Plc said yesterday. Average transaction prices, which rose to a record in the second quarter, dropped to 9,092 yuan per square meter, the London-based broker said in a report.

The volume of transactions slid 39 percent from the second quarter and two-thirds from the same period last year to 2.9 million square meters, according to Savills.

China's stocks also fell for a second day today, with metal producers leading the way, on concern profits will decline as economic growth slows.

Jiangxi Copper Co., China's second-biggest producer of the metal, slid 5.9 percent after copper and zinc futures slumped by the exchange-imposed 4 percent daily limit in Shanghai. China Shenhua Energy Co., the nation's largest coal producer, fell 3.2 percent as more affordable oil reduced the allure of alternative energy sources. Citic Securities Co. fell 2.9 percent after a second competitor in as many days reported a slump in profit.

Chinese Exports Maintain Strong Momentum In August

2008-10-13T20:40:00.002+02:00

China’s trade surplus hit a record $29.3bn in September as exporters succeeded in defying forecasts of falling international demand – for the moment, at least.

Exports rose 21.5 percent from a year earlier to $136.4 billion after gaining 21.1 percent in August, according to data from the Chinese customs bureau. China has cut interest rates twice in the last month in an attempt to stimulate the economy as the worst financial crisis since the Great Depression undermines global growth. The surplus adds to the already existing $1.8 trillion of foreign-currency reserves.

The expanding trade surplus – up from the previous record of $28.7bn in August – will bolster China’s slowing gross domestic product growth rate but could also refocus international attention on Beijing’s effort to support exporters in recent months by slowing the renminbi’s appreciation against the US dollar.

Chinese imports grew 21.3 per cent year-on-year in September, their weakest performance for more than a year.

It is clear that the focus of government policy has shifted away from combating inflation, which hit a 12-year high of 8.7 per cent in February, and toward supporting growth. China remains relatively insulated from the current international financial turmoil. Major state banks have been extensively recapitalised in recent years and have only limited international exposure, while the government has been enjoying rapid growth in tax revenues and over $1.8bn in foreign exchange reserves.

However, local investors are already suffering from dramatic falls in stock prices and the slump in urban property markets, increasing vulnerability to any fall in export demand.

August PMI Indicates Continuing Contraction In Chinese Manufacturing

2008-09-01T12:52:00.003+02:00

Manufacturing in China contracted for a second month in August, according to the latest reading on the manufacturing PMI. The China Federation of Logistics and Purchasing Purchasing Managers' Index registered a seasonally adjusted 48.4 in August, unchanged from July.

The Chinese authorities have become increasingly concerned that the impact of a global slowdown may weigh heavily on their export oriented economy, and they have recently attempted to put a brake on gains in the yuan and have also loosened lending quotas to help exporters and small businesses following four quarters of slowing economic growth. China's growth slowed to a 10.1 percent annual rate in the second quarter of this year, coming down quarter by quarter from the high of 12.6 percent attained in the second quarter of 2007.

The government is considering spending an extra 400 billion yuan ($58 billion) to stimulate the economy, according to reports in Chinese news media. A plan awaiting approval from the State Council and the National People's Congress includes 220 billion yuan of spending and 150 billion yuan of tax cuts, the Beijing-based Economic Observer newspaper reported last week. In addition China has tripled railway spending this year to 300 billion yuan. The current five-year plan, which runs through 2010, calls for investing almost 4.8 trillion yuan on power stations, waterways, roads and other infrastructure projects -- more than the combined output of Taiwan, Thailand and Vietnam. Reconstruction after May's Sichuan earthquake could cost another 1 trillion yuan, the government says.

Monetary policy may also be loosened, and the People's Bank of China said in August that it would ``fine-tune'' monetary policy to cushion the economy as overseas demand weakens. This is being widely interpreted as meaning that the central bank will reduce the portion of deposits banks are required to hold as reserves - possibly by as much as 2.5 percentage points, bringing the level down to 15 percent.

China Investment In Fixed Assets Accelerates

2008-08-15T10:45:00.003+02:00

China's factory and property spending growth accelerated in July, fueled by rebuilding after the Sichuan earthquake in May and snowstorms in January and February. Urban fixed-asset investment rose 27.3 percent to 7.22 trillion yuan ($1 trillion) year on year in July, according to the latest data from the Chinese statistics bureau, after gaining 26.8 percent in the first half. China is at the present time busy rebuilding roads, power lines, factories and homes after the worst snowstorms in half a century and an earthquake that killed more than 69,000 people.

Railway spending climbed 35.8 percent in the first seven months to 105 billion yuan, up from 20.4 percent for the first half. China plans to spend 3.8 trillion yuan on transportation infrastructure in its five-year plan running through 2010.

Growth in spending in real-estate development slowed to 30.9 percent from 33.5 percent. Ferrous-metals investment climbed 31.6 percent from 27.5 percent. Non-ferrous metals rose 40.5 percent after climbing 39.2 percent.

China's Industrial Output Slows in July 2008

2008-08-14T13:53:00.003+02:00

China's industrial production grew at the slowest pace since February 2007 on weaker export orders and factory shutdowns to clear the air for the Olympic Games. Production rose 14.7 percent in July from a year earlier, the statistics bureau said today, after gaining 16 percent in June.

Weakness in economies around the world have reduced orders for export products, while higher fuel and raw-material prices deterred some companies from expanding. The slowdown, exacerbated by attempts to prevent pollution in Beijing during the Olympics, suggests an acceleration in China's July export growth is unlikely to be sustained.

The yuan fell to 6.8620 against the dollar as of 5:05 p.m. in Beijing after closing at 6.8570 yesterday.

Textile output rose 10 percent in July from a year earlier after gaining 12.4 percent in June. Steel products growth weakened to 7 percent from 11 percent. Cement output rose 6.3 percent, down from 7.9 percent. Growth in electricity output slowed for the fourth straight month, climbing 8.1 percent after an 8.3 percent gain in June.

China's economy expanded 10.1 percent in the second quarter from a year earlier, down from 11.9 percent in all of 2007. Still, rising domestic demand may help sustain industrial production to some extent. Retail sales jumped 23.3 percent in July from a year earlier.

China Retail Sales Rise At Record Pace In July

2008-08-13T11:50:00.001+02:00

China's retail sales expanded at the fastest pace in at least nine years in July as incomes and prices climbed in the world's fastest-growing major economy. Sales rose 23.3 percent to 862.9 billion yuan ($126 billion) after gaining 23 percent in June, the statistics bureau said today.

As we can see, as inflation is falling back the real rate of increase in retail sales is accelerating. This, in part, is a result of increases in wages.

According to the most recent data from the Chinese statistical office, in the first half year of 2008, the average wage of on-duty staff and workers in urban units reached 12,964 yuan, a year-on-year increase of 18.0 percent. Of the total, the average wage of state-owned units was 13,800 yuan, up by 17.0 percent; that of collective-owned units was 7,789 yuan, rose by 18.9 percent; and that of units of other types of ownership was 12,610 yuan, an increase of 19.2 percent.

Urban disposable income increased 14.4 percent in the first half, or 6.3 percent after stripping out inflation. Also per capita consumption expenditure was 5,490 yuan, up by 13.7 percent over the same period of the previous year, a real increase of 5.7 percent after deducting price factors. China aims to increase consumption to reduce dependence on investment and overseas sales for economic growth.

The problem with this scenario at the present time is the impact on producer prices. China's producer prices climbed at the fastest pace since 1996 in July on energy and commodity costs, underscoring the significant risk of second round effects and the possibility of a rebound in consumer-price inflation. Factory-gate prices rose 10 percent in July from a year earlier, the statistics bureau said yesterday, after gaining 8.8 percent in June.

The acceleration in retail sales and the surge in fixed asset formation at a time when industrial output is weakening and exports are slowing means only one thing as far as I am concerned: a correction is coming.

Today's data comes two days after figures showing exports climbed 26.9 percent in July, accelerating from 17.2 percent in June.

China Inflation Drops To 6.3% In July

2008-08-12T16:54:00.004+02:00

China's annual inflation rate dropped to 6.3% in July - the slowest pace in 10 months - and significantly down from February's 8.7 percent rise which was the fastest rate in 12 years.

The slowdown may encourage government policies aimed at sustaining growth in the world's fourth-biggest economy rather than fighting inflation. While policy makers have halted the yuan's appreciation and boosted tax rebates to help exporters, data yesterday showing the fastest producer-price inflation in 12 years underscores the risk that consumer prices will rebound.

China's producer prices climbed at the fastest pace since 1996 in July on energy and commodity costs, underscoring the significant risk of second round effects and the possibility of a rebound in consumer-price inflation. Factory-gate prices rose 10 percent in July from a year earlier, the statistics bureau said yesterday, after gaining 8.8 percent in June.

The yuan rose 4.2 percent in the three months through March and 2.3 percent in the second quarter before stalling in the third. The currency remains Asia's best performer against the dollar this year. Gains make exports more expensive and cut import costs. China's exporters are concerned that a weakening global economy will erode shipments. Exports are now rising at an annual 22.6 percent rate, significantly down from the 25.7 percent pace achieved for whole year 2007.

China Manufacturing Contracts In June According To The PMI

2008-08-01T08:38:00.004+02:00

Manufacturing in China contracted - on a seasonally adjusted basis - for the first time in many years in July as export demand faltered and factories closed to clear the air before the Olympic Games. The Manufacturing Purchasing Managers' Index - prepared by the China Federation of Logistics and Purchasing - fell to a seasonally adjusted 48.4 in July from 52 in June. Any reading below 50 represents contratction, and this was the first such reading since the survey began in 2005.

The output index fell to 47.4 in July from 54.2 in June, while the index of new orders dropped to 46.2 from 52.6. The index of export orders declined to 46.7 from 50.2.

None of this is really too surprising, as it is hard to see how you can maintain 20% plus export growth as all your main customers' economies are slowing. The expansion in what is now the world's fourth-biggest economy slowed for the fourth straight quarter in the three months through June, according to initial estimates.

China's CPI Inflation Slows In June 2008

2008-07-24T18:29:00.003+02:00

China's inflation rate fell to 7.1 per cent in June from 7.7 per cent in May. The rate has now been falling steadily from a 12-year high of 8.7 per cent hit in February, according to the latest data from the national statistics bureau.

This reduction comes after months of government efforts to cool inflation by paying subsidies to increase food supplies and imposing price controls on food, fuel and other basic goods, and moves at the central bank to increase the percentage of their deposits that the banks need to keep as reserves.

The government gave no June figure for food prices, but said they rose 20.4 percent in the first half over the year-earlier period. JPMorgan estimated June's food price rise at 17.5 percent, compared with 19.9 percent in May.

China's main planning agency, the National Development and Reform Commission, have said that inflation in housing prices, another key area of concern, slowed slightly in June but that costs in 70 major cities still were up 8.2 over June 2007.

China's producer price index (PPI), which measures factory-gate inflation, reached 8.8% year-on-year in June, the fastest rise since 1999. In May it rose by 8.2%. Since it usually takes six months for manufacturers to pass on their cost pressure to end consumers, this acceleration in the PPI seems likely to drive inflation higher again later in the year.

China's economy grew by 10.4 per cent in the first half of this year, officials also said today. China's economy grew by 10.1 percent in the three months ending June 30 over the same period last year, compared with 10.6 per cent in the first quarter of the year while for the whole of 2007 the economy grew at a rate of 11.9 per cent.

On the other hand export growth - which is the principle driver of the Chinese economy - dropped sharply in June to 18.2 percent which while still very rapid was well down from May's rise of 28 percent. The drop in the rate of increase seems to be due to slowing global demand, prompting suggestions regulators might slow the rise of China's currency, the yuan, or take other steps to help struggling exporters.

China's GDP Growth Slows In Q2 2008

2008-07-17T11:58:00.002+02:00

China's economy grew at the slowest pace since 2005 in the second quarter, prompting the yuan's biggest drop in seven weeks on speculation the government will slow its advance to protect exporters. Gross domestic product rose 10.1 percent from a year earlier, down from 10.6 percent in the first quarter, as exports weakened and the government curbed lending. Consumer prices rose 7.1 percent in June, slowing from 7.7 percent in May, according to the latest data from the statistics bureau.

GDP growth cooled for the fourth straight quarter.

The trade surplus for the second quarter narrowed 12 percent from a year earlier to $58.14 billion as import costs climbed and U.S. demand faltered.

Producer prices climbed 8.8 percent in June from a year earlier, the statistics bureau said today, after rising 8.2 percent in May.

China Manufacturing PMI June 2008

2008-07-01T08:40:00.002+02:00

China's manufacturing expanded in June at the slowest pace since August 2005 as the growth in export orders weakened for a third month, according to a purchasing managers survey. The Purchasing Managers' Index produced by the China Federation of Logistics and Purchasing fell to 52 from 53.3 in May.

The index of new export orders declined to 50.2 from 53.4. A reading above 50 reflects an expansion, below 50 a contraction.

Those for new orders and output also fell, while the input-price index climbed to a record, underscoring the threat to manufacturing from higher costs for labor and raw materials. In the first five months, 2,331 shoemakers closed in Guangdong province, the world's largest footwear production center,according to the China customs bureau yesterday. The principle causes appear to be rising wages and appreciation in the yuan that has eaten into export profits.

The global economic slowdown which has followed the U.S. housing slump added to the increase in borrowing costs as China's central bank tries to fight the rising inflation may mean that China's growth will drop below 10 percent this year for the first time since 2002. One factor here will be the resilience in exports, and there are already signs of some weakening, since overseas shipments climbed 22.9 percent in the first five months of this year, down from the 25.7 percent gain for all of 2007, and in the present climate it is hard to see this trend reversing.

China Increases Energy Prices

2008-06-20T07:55:00.002+02:00

China increased energy prices across the board yesterday in an important policy shift that is likely to have an impact both inside and outside the country.

On the one hand the measure is bound to add to the country’s already high inflation rate. On the other, if the rate of demand increase were to slow inside China itself, then this would perhaps take some pressure off global oil prices.

Global oil prices fell immediately following the announcement in Beijing that petrol and diesel prices would go up by to 18 per cent and electricity tariffs would rose by just under 5 per cent. Oil prices – which were already under pressure from a possible Saudi announcement this weekend that they are going to increase oil production – fell more than $4 a barrel to $132.32.

Before the announcement, petrol prices in China were about 40 per cent below those in the US. In the last month, India, Taiwan, Malaysia and Indonesia have all cut their subsidies amid mounting fiscal cost and in spite of concern about high inflation, and the Chinese decision does of course follow last weekend's Group of Eight finance ministers statement said last weekend that “reducing subsidies” was an important step on the way to lessening the rate of increase in oil prices.

We will now need to watch and wait to see what impact the decision will have on China's internal inflation, and on Chinese demand for fuel products. We may well not see lower Chinese oil use in the short-term, since the decision may well be more effective in stimulating supply than it will be in curb demand.

The previous price caps had caused significant problems of shortages, and the two large state-owned refiners had been continuously complaining about their losses and the shortages which had been produced at petrol stations across the country as many small refineries stopped operations. So ironically the increase in retail prices could now boost Chinese demand, rather than reduce it, at least in the short term, simply because higher prices will probably encourage refiners to import more oil and boost sales in order to to ease current petrol and diesel shortages.

The IEA said earlier this month that the fuel shortages that have beset China since 2007 suggest that “pent-up demand remain considerable”.

China Factory Investment May 2008

2008-06-17T17:53:00.002+02:00

China's spending on factories and real estate grew 25.6 percent through May, led by property development and boosted by reconstruction work after snowstorms in January and February. Urban fixed-asset investment rose to 4.03 trillion yuan ($585 billion) in the first five months from a year earlier, according to the latest data from the Chinese statistics bureau. This follows a gain of 25.7 percent in the four months to April. Im May the year on year increase over May 2007 was 25.7 percent.

Investment in real-estate development was up 31.9 percent in the first five months from a year earlier. Spending on non- ferrous metals jumped 41.5 percent and coal surged 47 percent. China is rebuilding roads, power lines, factories and homes after the worst snowstorms in half a century and the May 12 earthquake that killed more than 69,000 people.

New investment projects rose by 9,667 in the first five months from a year earlier to 84,368. Planned spending on those ventures was 2.72 trillion yuan, down 2.5 percent.

China Industrial Output May 2008

2008-06-16T09:46:00.004+02:00

China's industrial-production growth accelerated on rising exports, signaling that the world's fourth-biggest economy is weathering a global slowdown. Output rose 16 percent in May from a year earlier after gaining 15.7 percent in April, the statistics bureau said today.

Overseas shipments surged last month and retail-sales growth was close to the highest in nine years, keeping factories busy even as the deadliest earthquake in 32 years disrupted output in Sichuan province. The shortening of a weeklong May holiday to a three-day break boosted production.

Sichuan's small role in China's manufacturing limited the May 12 disaster's effect on production. Quake reconstruction work is boosting output of some products like steel sheets for housing.

Raw-coal production rose 18.5 percent in May from a year earlier after gaining 13.9 percent in April. Crude-oil output climbed 1.8 percent in May after increasing 0.5 percent in April.

China's export growth accelerated to 28.1 percent in May from a year earlier. Retail sales gained 21.6 percent. For the first five months, industrial production climbed 16.3 percent from a year earlier, the statistics bureau said. China's economy expanded 10.6 percent in the first quarter from a year earlier.

China Inflation May 2008

2008-06-12T11:12:00.003+02:00

China's inflation rate slowed to 7.7 percent in May 8.5 percent in April, the statistics bureau said. Aprils number was not far from February's twelve year high of 8.7%.

However China's money-supply growth accelerated to the fastest pace in four months in May, adding pressure on the central bank to prevent cash inflows from fueling inflation. M2, the broadest measure, rose 18.1 percent from a year earlier to 43.6 trillion yuan ($6.3 trillion), according to the People's Bank of China today, after gaining 16.9 percent in April.

The trade surplus, foreign direct investment and inflows of capital from investors betting on currency gains are flooding the world's fastest-growing major economy with cash. The People's Bank of China earlier this week ordered lenders to increase the proportion of deposits that they set aside as reserves to a record 17.5 percent (as of June 25) in an attempt to slow down monetary growth.

China Export Growth Accelerates in May

2008-06-11T13:22:00.003+02:00

China's export growth accelerated in May, easing concern that a strengthening yuan and a slowdown in U.S. demand may be in the process of slowing excessively the Chinese economy. Overseas sales rose 28.1 percent from a year earlier, after gaining a revised 21.9 percent in April, according to the Chinese customs bureau today.

Exports to the U.S. accelerated, withstanding a 10 percent gain in the yuan against the dollar in the year through May. Imports jumped 40 percent because of soaring raw-material costs, supporting the central bank's case that inflation is a bigger threat than weakening global demand. Surging prices for iron ore, crude oil, oil products, coal and soybeans drove the biggest increase in imports in almost four years, according to the customs bureau. The gain was 26.4 percent in April.

The trade surplus was $20.2 billion, down from $22.4 billion a year earlier and less than the $21.3 billion estimate in the survey of economists. For the first five months, the surplus has narrowed 9 percent from a year earlier.

Exports to the U.S. rose 9.1 percent in the first five months from a year earlier, up from the 6.9 percent gain through April, the customs bureau said. Shipments to the European Union climbed 27.4 percent, an increase from 25.4 percent.

Machinery and electronic exports climbed 59 percent from a year earlier. Trade with India surged 70 percent in the first five months, the quickest gain among China's top 10 trading partners, the customs bureau said.

Producer prices rose 8.2 percent in May, the biggest increase in more than three years, the statistics bureau said today, indicating consumer-price inflation which may have fallen back in May to 7.7% (according to recent "leaks") from the 8.5% peak in February could well rebound in the not too distant future.

The producer price of gasoline rose 11 percent in May from a year earlier after gaining 10.8 percent in April. Ferrous metals jumped 26.7 percent after climbing 24.8 percent, the statistics bureau said.

House prices in China's 70 major cities rose 10.1 percent in April from a year earlier, slowing for a third month after the government raised mortgage rates and imposed stricter down- payment requirements.

China's Central Bank told lenders earlier this week to set aside more money for the fifth time this year in an attempt to cool inflation. Banks must put aside a record 17 percent of deposits as reserves starting June 15, and this figure will rise to 17.5 percent from June 25, according to the People's Bank of China. The move is expected to drain about 422 billion yuan ($60 billion) from the financial system. Local-currency deposits stood at 42.2 trillion yuan at the end of April.

China Manufacturing PMI May 2008

2008-06-02T14:47:00.011+02:00

China's manufacturing growth slowed in May according to two different measures which are published monthly.

Growth slowed from the fastest pace in four years according to a survey of purchasing managers by CLSA Asia-Pacific Markets. The CLSA China Purchasing Managers' Index fell to a seasonally adjusted 54.7 from 55.4 in April.

The CLSA index, started in April 2004, is based on a survey of more than 400 manufacturing companies. The survey tracks changes in output, new orders, export orders, employment, inventories, input costs and output prices. A reading above 50 shows an expansion in business activity, below 50 a contraction.

The output index dropped to 56.7 in May from 57.9 in April, while the index of new orders fell to 57.3 from 58.6. The export orders index in the CLSA survey rose to 52.2, a four-month high, from 52.

At the same time the Purchasing Managers' Index published jointly by the China Federation of Logistics and Purchasing and the government's statistics bureau fell to 53.3 in May from a record 59.2 in April.

The index of export orders on this measure fell to 53.4 from 58.9. The index of new orders declined to 55.4 from 65. The output index dropped to 55.7 from 66.5.

The index is based on a survey of more than 700 companies in 20 industries, including energy, metallurgy, textile, automobile and electronics. A reading above 50 reflects an expansion, below 50 a contraction.

Whichever way you look at it, and no matter the differences between the two surveys, manufacturing seems to have slowed somewhat in China in May.

China Producer Prince Index April 2008

2008-05-15T15:28:00.002+02:00

In April, Producers’ Price Index (PPI) for manufactured goods was up by 8.1 percent from April 2007; purchasing prices for raw material, fuels and power rose by 11.8 percent.

Of the total, PPIs for mining and quarrying industry increased 27.2 percent; that for raw materials industry and machining industry correspondingly up by 10.4 and 6.0 percent; that for means of consumer goods grew 5.4 percent. Of which, price for foodstuff increased 11.9 percent; that of clothing and commodities rose 2.3 and 3.7 percent, while that for durable consumer goods dropped 0.5 percent.

In terms of different categories:

PPI for crude oil increased 37.9 percent, year-on-year. The prices for oil products, such as gasoline, diesel and kerosene increased 10.8, 10.2 and 11.7 percent respectively.

PPI for polystyrene decreased 0.1 percent compared with the same month a year ago; that of latex up by 21.5 percent; and that of terylene rose by 1.2 percent, year on year.

PPI for mining and washing of coal industry was up by 26.0 percent from last March. Of which, PPI for crude coal increased 27.4 percent.

PPI for smelting and pressing of ferrous metals grew 24.8 percent from the same month last year. Of which, PPIs for ordinary large rolled-steels, medium rolled-steels, small rolled-steels, wire rod and heavy steel plate correspondingly increased 29.3, 41.1, 34.6, 37.0, and 24.9 percent, year on year.

PPI for smelting and pressing of nonferrous metals gained a year-on-year rise of 4.7 percent. Of the total, the increase of copper and lead surged 0.6 and 20.9 percent, while that aluminum and zinc dropped 0.1 and 24.2 percent respectively.

In addition, wherein the purchasing price for raw materials, fuel and power, nonferrous metal materials, ferrous metals, and chemical materials increased21.2, 20.8, 6.1, and 4.2 percent respectively, year-on-year.

From January to April, PPI grew 7.2 percent, year-on-year; the purchasing price for raw materials, fuels and power products increased 10.3 percent.

China Fixed Asset Investment April 2008

2008-05-15T15:22:00.003+02:00

China's factory and property spending climbed 25.7 percent in the four months up to April. Fixed-asset investment in urban areas rose to 2.8 trillion yuan ($400 billion), the statistics bureau said today.

China ordered banks this week to set aside a record proportion of their reserves to cool the world's fourth-biggest economy after inflation surged last month to almost a 12-year high. Spending by newly appointed local government officials and reconstruction work after the 7.9-magnitude quake may boost investment growth this year.

Property investment rose 32 percent, accounting for a quarter of total spending, and investment in coal mining surged 47 percent.

What is now the world's fourth-largest economy grew 10.6 percent in the first quarter, a slower pace than the 11.2 percent growth in the previous three months, after exports cooled.

Inflation, on the other hand was up at 8.5 percent in April.

Producer prices rose 8.1 percent last month from a year earlier, the fastest pace in more than three years.

China Industrial Output April 2008

2008-05-14T15:20:00.002+02:00

China's industrial production growth slowed slightly in April. Output was up 15.7 percent in April from April 2007, the statistics bureau said today. This follows a 17.8 percent increase in March.

China Retail Sales April 2008

2008-05-13T14:04:00.003+02:00

China's retail sales climbed (in money terms)at the fastest pace since at least 1999 in April, but since inflation was also up near a decade high the actually - inflation adjusted - rate of increase was of course much less. Sales rose 22 percent to a record 814.2 billion yuan ($116 billion) in April after gaining 21.5 percent in March, the statistics bureau said today. If we look at the comparison on the chart below, what we can really say is that there is no sign, at this point, of any economic slowdown, at least as far as retail sales go.

Rising incomes will help to counter the effects of surging prices, stock market declines, and the scrapping of a seven-day May holiday, State Information Center economists led by Fan Jianping said in a report published this month. Real urban disposable incomes climbed 11.5 percent in the first quarter from a year earlier to 4,386 yuan ($627). Rural earnings rose 18.5 percent to 1,494 yuan.

Meantime China's money-supply expansion unexpectedly acceleratedin April, adding pressure on the central bank to prevent cash from further fueling inflation which is already close to the fastest pace since 1996.

M2, the broadest measure, rose 16.9 percent at the end of April from a year earlier to 42.9 trillion yuan ($6.1 trillion), the People's Bank of China said today, after gaining 16.3 percent in March.

Outstanding local-currency loans rose 14.7 percent at the end of April from a year earlier, the central bank said. Lenders extended 463.9 billion yuan of new loans last month, bringing the total to 1.8 trillion yuan for the first four months. Outstanding local-currency deposits rose 17.7 percent at the end of April from a year earlier, the central bank said. Household savings rose 99.2 billion yuan from the previous month.

China Inflation April 2008

2008-05-12T09:59:00.005+02:00

China’s consumer price inflation clung near a 12-year high in April, maintaining pressure on the government to stick to its tight policy stance in spite of softening global growth. As a result China has today once more instructed banks to set aside more deposits as reserves, this is now the fourth time so far this year such action has been taken. Banks must place a record 16.5 percent of deposits with the central bank, up from the previous 16 percent, the People's Bank of China said today on its Web site.

Apart from February’s reading of 8.7 per cent, inflation was last higher in May 1996, when the rate was 8.9 per cent. Food prices, which make up a third of the consumer basket, have been the overwhelming driver of inflation. They rose 22.1 per cent in April from a year earlier, though weekly government reports on fresh food prices have showed a slight dip in May. Non-food prices rose 1.8 per cent in April from a year earlier, the same as in March.

Zhou Xiaochuan, China’s central bank governor, said on Saturday that the country would give precedence to tackling inflation over targeting growth or employment. Today's increase in reserve deposits will freeze about 208 billion yuan ($30 billion) in the banking system, in an attempt to cool the world's fastest-growing major economy by restraining lending. However 7.5 percentage points of increase in the requirement since the start of last year has so far failed to stop the lending growth that is fuelling both the expansion and all this inflation, so it is extremely unlikely that an additional o.5 percentage point raise at this juncture will do the trick.

And even as easing food prices give some grounds for thinking that the worst on this front may be over, pipeline pressures have now been steadily builting up at the producer price level, and the producer price index, or best available measure of factory-gate inflation, hit a three-and-a-half year high of 8.1 per cent in April. This followed an 8 percent gain in March and was the quickest pace since November 2004. Thus there may be a whole stream of "second round" effects still to come.

Producer prices of ferrous metals jumped 24.8 percent in April from a year earlier, after rising 21.2 percent in March, the statistics bureau said. Gasoline prices climbed 10.8 percent after gaining 9.9 percent and clothing costs increased 2.3 percent after climbing 2 percent.

Higher wages and energy and commodity costs led a third of manufacturers to raise prices in April, according to a survey by CLSA of more than 400 purchasing managers. The Labor Contract Law, imposed on Jan. 1, mandates minimum wages and limits overtime work. The average wage in Chinese urban areas climbed 18 percent in the first quarter from a year earlier to 6,524 yuan ($932).

The government declared it would tighten monetary policy this year to fight inflation, but it has yet to raise interest rates after six increases in 2007.

Instead, it has drawn on an array of tools, from bank lending curbs to faster yuan appreciation – the central bank last Monday set the highest daily reference rate for the yuan, 6.8920 per dollar, since it ended a fixed peg to the US currency in July 2005.

China Exports April 2008

2008-05-09T22:41:00.002+02:00

China's export growth slowed in April and the trade surplus was little changed as economies around the world weakened. Exports rose about 21.8 percent from April 2007, following a 30.6 percent gain in March, according to figures derived from Ministry of Commerce data. The trade surplus was about $16.8 billion compared with $16.7 billion a year earlier.

Central bank Governor Zhou Xiaochuan said on May 4 that weaker export growth has been a factor in the yuan's failure to appreciate versus the dollar after a 4.2 percent jump in the first quarter. Smaller gains in shipments reduce the risk that inflows of cash from overseas sales will fuel 11-year high inflation and overheat the world's fastest-growing major economy.

The gain in overseas shipments compares with the 21.4 percent pace in the first quarter and the 26 percent increase for all of last year. Imports grew about 26.1 percent in April from a year earlier after gaining 24.6 in March. The increase partly reflects rising commodity prices.

The world's fourth-biggest economy expanded 10.6 percent in the first quarter from a year earlier and inflation accelerated to 8 percent, the fastest pace since 1996. The yuan had its biggest gain since a fixed-exchange rate ended in 2005.

China's currency has climbed 18 percent versus the dollar since the peg to the U.S. currency was scrapped, making the nation's products more expensive in overseas markets and cutting import costs. Since April, it has gained only 0.3 percent.

Inflation, driven by food and wage costs, climbed to an 11-year high of 8.7 percent in February, more than the central bank's target for the year of 4.8 percent. Producer prices rose 8.1 percent in April, the fastest pace in more than three years, the statistics bureau said today.

The Ministry of Commerce released data for shipments of mechanical and electrical products for the first four months on a ministry Web site today. It gave the value of exports of those products, $251.3 billion, and said they represented 59.2 percent of total exports. It also gave the value for imports, $173.3 billion, said they were 47.3 percent of total imports.

China Inflation and GDP Growth March 2008

2008-04-16T12:27:00.007+02:00

Inflation dropped back slightly in March, but it would be premature to begin to draw any substantial conclusions for the future of Chinese inflation from this. Consumer prices rose 8.3 percent in March over March 2007, down only slightly from February's 8.7 percent, which had been the highest rate in nearly 12 years, according to the National Bureau of Statistics this morning. The cost of food is up 21 percent since the beginning of the year.

The price spike that began in mid-2007 has been blamed on shortages of pork, grain and other food. The government is trying to increase output by raising farm subsidies and curbing exports, but that effort was hampered by snowstorms in January and February that wrecked crops.

And March inflation is still well above the 4.8 percent target that Premier Wen Jiabao has set for this year. Li Xiaochao, the statistics bureau spokesman, said that to meet Wen's target, inflation has to fall below 4.2 percent each month for the rest of the year.

On Wednesday, the central bank raised the amount of money Chinese banks must hold in reserve by 0.5 percentage points to a record high of 16 percent in a new effort to curb lending.

China's economic growth slowed in the first quarter and the world's fourth-largest economy grew 10.6 percent in the first three months of 2008 from a year earlier, the National Bureau of Statistics said in a news conference in Beijing. This was an easing from 2007, when China's economy expanded by 11.7 percent in the first quarter and 11.9 percent for the year, according to data from the bureau.

Industrial output, a key measure of the activity level in China's plants and factories, was up 16.4 percent in the first quarter from a year earlier. It compared with 18.3 percent growth in the first quarter of 2007.

China's fixed-asset investments, the main indicator of state-funded spending on new productive capacity, rose 24.6 percent in the first quarter of 2008 from a year earlier, the bureau said. This figure did not seem to follow the general slowing trend, as in the first three months of 2007, it had risen by 23.7 percent.

One reason for the acceleration in fixed asset investments might well be that such investments are fuelled by continued ample liquidity in the system. That liquidity, in turn, is boosted by incoming foreign funds, in the form of exports earnings, foreign direct investments, and speculative money banking on short-term gains.

Chinese retail sales rose 20.6 percent in the first quarter from a year earlier, according to the bureau. The growth was 5.7 percentage points higher than in the same three-month period last year. A large chunk of this increase simply reflects the fact that the inflation level was up from the 3% level in Q1 2007, since retail sales data are given in nominal terms, but even stripping out the 8% inflation, real sales are up 12.6% year on year, which certainly isn't a slowdown and may well indicate a slight increase.

One analysts response, widely quoted in the press coverage is "Now we really need some rate hikes,". But this is more complicated than it seems, since - as reported here - China's foreign-exchange reserves, the world's largest, surged to $1.68 trillion at the end of March, adding pressure on a government already trying to prevent money inflows from fueling inflation already at an 11-year high. Currency holdings expanded 40 percent from a year earlier, according to data from the People's Bank of China. The assets grew a record $153.9 billion from the end of December, after a $94.6 billion increase in the fourth quarter.

China has systematically held off from raising interest rates after six increases last year as the U.S. Federal Reserve cuts borrowing costs and the fear grows that an increase in yield differentials would only attract even more liquidity. China last raised interest rates at the end of December when the benchmark one-year lending rate was increased by 0.18 percentage point to a nine-year high of 7.47 percent. This compares with the 2.25% which is currently on offer for the Federal funds rate. It isn't really so obvious to me at least that what China most needs is another round of interest rate rises, although what to do about the inflation is a real head-cracker.

China's Foreign Currency Reserves Soar 40% Year on Year

2008-04-11T22:53:00.002+02:00

China's foreign-exchange reserves, the world's largest, surged to $1.68 trillion at the end of March, adding pressure on the government to prevent money inflows from fueling inflation already at an 11-year high. Currency holdings expanded 40 percent from a year earlier, according to data from the People's Bank of China today. The assets grew a record $153.9 billion from the end of December, after a $94.6 billion increase in the fourth quarter.

To tame liquidity, the central bank has pushed the required reserve ratio for lenders to a record 15.5 percent. China has held off raising interest rates after six increases last year as the U.S. Federal Reserve cuts borrowing costs.

The central bank today cited slower money-supply growth as evidence that its ``tight'' monetary policy is having an effect. M2, the broadest measure, grew 16.3 percent in March from a year earlier, the slowest pace since January 2007. M2 was up 17.5 percent year on year in February. Outstanding local-currency loans rose 14.8 percent from a year earlier, the central bank said. Lenders extended 283.4 billion yuan ($40.5 billion) of new loans in March, taking the total to 1.33 trillion yuan for the first quarter.Outstanding local-currency deposits climbed 17.4 percent from a year earlier, the central bank said.

A falling dollar contributes to the build-up of China's foreign reserves as the assets are quoted in the U.S. currency, according to UBS economist Jonathan Anderson. Anderson takes the view that:

"The onset of the credit crisis and the crumbling of the U.S. housing bubble precipitated a significant sell-off of the dollar. That has boosted the value of the assets that China holds in other currencies. A sizable portion, 35 percent to 40 percent of China's foreign-exchange reserves, is held in European and Japanese assets"

Chinese Wages on The Up and Up

2008-04-10T15:36:00.002+02:00

China's official statistics agency has confirmed what some of us have been suggesting was the case for some time now: labor costs have been rising fast. The National Bureau of Statistics reported on Tuesday the fastest growth in average wages in six years. But the figures mask a widening gap between workers in privileged occupations that receive heavy state protection and their counterparts in bricks-and-mortar manufacturing and extractive industries more or less exposed to the full brunt of competition.

The mean annual wage for a typical urban Chinese employee grew at a 18.72% rate in 2007, to 24,932 yuan ($3,556.63), or 99.32 yuan ($14.17) per day, the National Bureau of Statistics said, adding that it was the fastest growth in six years and higher than the 14% on average of the preceding six years.

While the news hardly came as a surprise to foreign investors grappling with the rapidly climbing costs of doing business in China, it was met with incredulity from Chinese critics, who were quick to highlight the stark disparities in fortune among Chinese workers that the national average wage figures hide.

The statistics agency did not release a detailed industry-by-industry profile, but China Business News, a business daily, pointed to earlier data released by the Beijing municipal government indicating that state-protected industries--in securities, banking and aviation--had reported average yearly wages exceeding 100,000 yuan ($14,265.34) in 2007, more than five times those for nonmetals mining and extraction, farming and traditional manufacturing lines such as textiles and sportswear, which paid less than 20,000 yuan ($2,853.07) to their workers. The figures were for Beijing itself but were broadly in line with those issued in recent years by the central government.

Industries enjoying a monopoly or near monopoly position, such insurance, legal services, telecommunications, tobacco, oil and gas are now paying a mean annual wage of between 80,000 yuan ($11,412.27) and 100,000 yuan.

In addition to the stark discrepancies among industries, complaints targeted the yawning gap between highly paid executives and low-level staff, as well as the geographical disparities in wages between workers living in the prosperous cities, especially those near the coast, and those in outlying districts. Attention was also directed to the increasing number of migrant workers who have dropped out of the national statistics as a result of employers' reluctance to put them on staff, as they strive to reduce their cost basis.

China's First Quarter Trade Surplus Falls and the Yuan Also Rises

2008-04-10T15:18:00.004+02:00

China's quarterly trade surplus shrank for the first time in more than three years in the first quarter of 2008, offering additional evidence that cooling exports are starting to slow economic growth. The trade surplus narrowed 10.2 percent to about $41.6 billion in the three months to March 31 when compared with the same period a year earlier. The trade surplus for March alone doubled to about $13.6 billion from a year earlier. Last year's surplus of $6.8 billion was depressed by changes to export taxes and China's Lunar New Year.

China's exports expanded 21.4 percent to $306 billion in the first quarter, slowing from an increase of 27.8 percent a year earlier. Imports climbed 28.6 percent to about $264 billion. China's exports of machinery and electronics products rose 23.1 percent to $181.4 billion in the first quarter from a year earlier, accounting for 59.3 percent of the nation's shipments. Machinery and electronics imports rose 16.4 percent to $125.3 billion, making up 47.4 percent of imports.

Foreign direct investment almost doubled to $27.4 billion from a year earlier, the Ministry of Commerce said today, adding to the cash flooding the economy from exports and fanning price increases. Investment by foreign companies climbed 39.6 percent to $9.3 billion in March from a year earlier. In the first quarter of last year companies invested $15.9 billion in China.

In separate news from the central bank we have learnt that China's wholesale prices jumped 10.2 percent in March from a year earlier. That was the fastest pace since at least November 2000 and doesn't bode at all well for the CPI numbers which are due to be released in the next few days.

Meanwhile the yuan continues to be on the up and up, rising past 7 to the dollar for the first time since China scrapped its fixed-exchange rate in 2005 as policy makers accelerate gains to cool inflation at an 11-year high. The currency strengthened as much as 0.16 percent today to 6.9907, bringing the yuan's advance to 18.4 percent since the end of the peg. The yuan subsequently dropped back, gaining 0.14 percent on the day and holding at 6.9916 at the 5:30 p.m. close in Shanghai, according to the China Foreign Exchange Trade System. The yuan has taken less than six months to break 7 to the dollar after taking 1 1/2 years to climb to 7.5 from 8. Forward contracts show traders are betting on an 11.2 percent advance to 6.2898 in the next 12 months.

The currency's gain against the dollar since the peg ended compares with 5.5 percent for the Taiwan dollar, 9 percent for India's rupee and 34 percent for the Philippine peso. The yen has climbed 11.9 percent and South Korea's won 6 percent.

It is also worth remembering that the yuan has fallen 10 percent against the euro since July 2005 and has declined against a number of other currencies such as the Australian dollar and Brazilian real, an effect which is largely a result of the dollar's slump.

The International Monetary Fund yesterday cut its 2008 economic growth forecast for China to 9.3 percent from 10 percent. China was the biggest driver of world growth last year, contributing 19 percent, according to an IMF estimate.

China's Industrial Output Recovers in March

2008-04-01T13:45:00.002+02:00

China's manufacturing activity bounced back strongly again in March following disruptions in February from some of the worst snowstorms in half a century, according to the findings of two surveys published today.

The CLSA Purchasing Managers' Index rose to 54.4, the highest level in five months, from 52.8 in February, while a separate PMI report, published jointly by the China Federation of Logistics and Purchasing and the statistics bureau, registered its highest reading in almost a year.

The CLSA index is based on replies to questionnaires sent to purchasing executives at more than 400 industrial companies. The survey tracks changes in output, new orders, employment, prices, inventories and delivery times. The data is seasonally adjusted. A reading over 50 indicates expansion. The output index rose to 55.6 in March from 53.2 in February, while the index of new orders climbed to 57.8 from 55.1. The index of export orders fell to 50.9 from 51.9.

The government index is based on a survey of more than 700 companies in 20 industries, including energy, metallurgy, and automobile and electronics manufacturing and attempts to track - on a seasonally adjusted basis - changes in output, new orders, export orders, employment, inventories, input costs and output prices. The output index in the government report jumped to 64.1 in March from 55.4 in February, while the index of new orders climbed to 63.8 from 56.9. The index of export orders rose to 59.1 from 51.3. All of this tends to suggest that there is still quite a strong level of underlying expansion in the Chinese economy.

China's Economic Development - People ... I see no People

2008-03-19T10:41:00.003+01:00

Guest Post by Claus Vistesen

Most eyes these days are centered, and rightfully so, on the steady deterioration of economic conditions in the US and thus by derivative the USD. The last event to keep our gaze fixed was the trouncing of the Bear Sterns stock, a US securities firm, on the back of the news that the Fed had supplied emergency funding for the company. Furthermore, we learned today that the Fed has exited the weekend by lowering the discount rate (from 3.25 to 3.00) as well as provided JPMorgan with funds to aim them in their buy of Bear Sterns.The situation in the US is of course turning into a real cliffhanger at the moment with the Fed working at all cylinders trying to allow the economy to emerge from one of the worst economic and financial crises in the US since, dare I say it, the 1930s. One thing is for sure, the US economy is down ... it most definitely is. But by peering across the commentary landscape you could easily get the idea that as the USD continues its decline the US economy is going to sink into the ground, move to Mars or whatever and the world can point to it as an example of what not to do and move happily forward. This is obviously not going to happen and my guess is that we are not going to get very far with this the US v. Europe et al. football match discourse but at this point in time, this is what we have.

Meanwhile, in terms of the global economy and the future sustainability of whatever economic/social system we want to preserve China would perhaps be a better place to look. And why would I be saying that you might ask?

Quite simply, an awful lot seems to depend on China in terms of solving some of the most pressing structural challenges for the global economy and the yoke is not for the faint of heart. On the main global macro level we have the pressures for China to revalue its currency to lead the way in an adjustment process of the global macroeconomic current account balances. As a part of this adjustment process China is also supposed to switch almost two decades' of development strategy into one where consumption and not investment/exports becomes the main driver of growth. In this respect, China also still has more than a trillion dollars worth of FX reserves it needs to allocate. Even more pressing, China now seems to be a net contributor to rising global inflation pressures through rising domestic consumer prices and wage costs (transmitted through) as well as China's hunger for energy and commodities which is providing a high floor for world base commodity and energy prices even if growth slows. Coupled with the newfound focus on global climate changes this is further putting the heat on China.

I don't deny that China is changing and that China has the power to surprise but when I look at the evidence presented to us from the data and reports from China I am increasingly worried that she simply won't be able to muster the load we are piling onto her shoulders and if a faltering US economy is bad for the global economy hick-ups in China could prove just as menacing if not more. At the heart of my argument lies demographics which should not surprise my readers. As such and if we want to fully understand the Chinese economy we need to realize the effects of a prolonged period of tough enforcement of one-child policy which are now set to enter the stage alongside the rest of the economic factors noted above.

In order have an anchor on which to tie my argument and the points I want to emphasise I am going to move in behind my colleague Edward Hugh who recently took the China issue under his clout in two most worthwhile notes. As Edward points to this may very well be a question of 'it's the fertility stupid' and in this light the tendencies we are currently observing in China should be watched very closely. The reports and incoming data all seem to point in one and the same direction. The double digit growth rate seems to be continuing as ever before even if exports recently waned to reflect the growing effect from a struggling US economy. However, and where China hitherto only had to worry about bubbly asset prices core prices and most strikingly wages are also now beginning to increase at levels which should have our eyebrows raised more than a bit. Curiously, this tendency coincides with the growing number of reports indicating how the idea that China is sitting on an endless pool of cheap labour to fill the factories is a myth in serious need for debunking. As Edward points to ...

For decades most labor economists saying that China’s vast population would supply a nearly bottomless pool of workers. So many people would be seeking jobs at any given time, this reasoning went, that wages would be stuck just above subsistence levels, probably for decades. As recently as four years ago, some experts estimated that most of the perhaps 150 million underemployed workers in the countryside would be heading to cities. The reality however has been quite different. Instead, from 2003 onwards sporadic labor shortages started to appear with growing intensity at factories in the Pearl River delta of southeastern China. Now those shortages seem to have spread to factories up and down the Chinese coast.

Only this week the Economist reports - in an article entitled Where is Everybody - that the vast annual migration of around 20m people that has been fuelling the manufacturing boom in southern China over the past two decades is rapidly diminishing.

Back in August 2007 Keith Bradsher had a good article in the NYT in which he makes the much cited connection between rising wage costs and rising import prices from China thus pointing to end of global labour arbitrage and what has been known as the Great Moderation. Of course, the picture is a bit more complex than this or as Scott Peterson notes in a recent piece, it may simply be a question of China trying to move up the value chain;

It seems that now that China has raised the standard of living for a sizable chunk of its workers, the rest of the work force isn't willing to accept the difficult working conditions that gave China its manufacturing cost advantage. This puts China in the same stage of workforce condition as Western countries. By that I mean that holders of capital can't find workers willing to take jobs at the wage on offer, so the country must either import workers willing to work at that wage as the US has done with agricultural workers, or outsource the work to foreign labor. Since bringing foreigners in is politically and practically nonsensical for China, the work goes overseas.

In fact, China may not in fact be lacking labour as such but there does indeed seem to be a lack of young labour with respect to ensuring the continuation of the Chinese growth model where investment and cheap factory capex have been the main driver. It still is of course but now the ill-wanted companion of inflation now seems to be slotted in on the passenger seat threatening to pull the gear lever and the steering wheel to make the car stray off the road. Paraphrasing Edward in his quote of Keith Bradsher the following is a fine summation of the problem at hand ...

"Plant owners’ refusal to hire blue-collar workers over 35 or 40 is colliding with the demographic reality of China’s one-child policy".

The evidence presented so far seems to be confirmed if we hit the world of academic journals. Consequently, a recent paper published in 'China and the World Economy' A Counterfactual Analysis on Unlimited Surplus Labor in Rural China starts out by debunking the myth of the unlimited supply of surplus labor from Rural China. The paper is about more than that however and thus enters the very pertinent discussion about how China is to integrate the rural regions with its coastal urban counterparts and how to manage the flow from one end of the value chain to other. At the heart of this rapid depletion of Chinese labour resources is then first and foremost the very rapid economic development which in itself has feasted upon the cheap labour supply. However, in the background of all this the one-child policy has surely and steadily exerted its effect and now the curves might just be intersecting. And the result? Well, there now seems to be mounting evidence that growth is now accompanied by ensuing effects of wages costs and inflation grapping hold not least because the composition of China's population is changing at a time where China is thundering ahead at double digit speeds. China's demographic profile and by derivative its fertility patterns are notoriously difficult to get a hold on. In a paper from March 2007 (Population and Development Review) four Chinese scholars embark on the formidable task of extracting an overall pattern from the very heterogeneous nature of Chinese fertility regimes as they vary between provinces ...

At both the prefecture and province levels, policy fertility ranges from the one-child rule to a policy that allows two children and more. At the same time, birth control regulations drafted and implemented by China’s provinces allow numerous kinds of exemptions to the one-child rule, based on considerations ranging from the demographic to the political. These results highlight the complex nature of Chinese birth control policymaking and implementation. Both regional and demographic distributions of policy fertility show that the mode of the policy falls into the category of 1.3 to 1.5 children per couple (38 percent of the prefectures and 53 percent of the population, respectively). The majority of the Chinese population (more than 70 percent) live in areas with a policy fertility level at 1.3 to 2.0 children per couple.

(...)

Based on local fertility policies and corresponding population distributions, we estimate that the overall average fertility targeted by the fertility policies for China as a whole is 1.47 at the end of the 1990s. This level is far below replacement.

The difference between policy and actual action has been frequently cited in a Chinese context as couples have attempted to circumvent the official policies to have more than one child. However, on the other hand it also seems that especially fertility rates in urban are persistently underestimated. The picture we are left with is that the TFR is (and has been for around a decade) in the region of 1.5 (with the pessimists tending towards 1.3 and the optimists 1.7). In the grand scheme of things these numbers are not so important when it comes to pointing out a path for China's population in the immediate future. What we know is that China is not set to age very rapidly and that the composition of the population will undergo a change of historical proportions as China irrespective of what happens to economic development now is set to join the league of economies with a steadily rising median age. In fact, China's size here aids us tremendously in our analysis as immigration to mitigate the effects is completely out of the question due to the size of the Chinese population. All this does not of course spell doom for China but it does mean that China is now entering a new stage of its economic development process. As Edward points out and as is echoed by this piece by one of the blogosphere's main China savants Michael Pettis this means that the number of young workers (aged 15 to 19) is now set to steadily decline as a proportion of China's population. We also know that the demographic changes will come very swiftly now and there does not seem to be many remedies on the table at this point. And those that we have are simply not adequate I am afraid and to pick (perhaps unfairly) on one I could refer to Yi Zeng's paper from June 2007 in which he sketches the 'options' for a fertility transition bringing China out of the vice of below-replacement fertility.

(...) the author concludes that China needs to begin a gradual modification of its fertility policy as soon as possible. He proposes a three-stage "soft-landing" strategy for fertility policy transition: (1) a 7-year initial smooth transition period; (2) from approximately 2014-15 to 2032-35 a universal two-child policy combined with late childbearing in both rural and urban areas; (3) after 2032-35 all Chinese citizens would be free to choose family size and fertility timing. This strategy will enable China to have much more favorable demographic conditions and socioeconomic outcomes, as compared to keeping the current policy unchanged.'

If we leave aside the rather dubious point that Chinese women are programmable robots who can actually be submitted to such a transition we also need to consider the speed with with the current process is moving along. The suggestion above simply denotes an understanding of the demographic transition which is wholly out of sync with the way it actually works in the real world. I won't be picking extensively on this paper and if anything we should be acknowledging the fact that this is actually narrated as a problem which needs to be addressed. Yet, we also need to understand that given the trajectory of China's demographics and its rampant growth rates any actions, on this front, taken in a post 2015-2020 perspective will literally be subject to such long term projections before they may have a concrete effect that it does not, in a scientific or policy related context, makes sense to discuss their merits.

So what the hell am I getting at here?

In the main, I have tried to take sketch, or take proprietorship of, the part of the discourse on China's economic development and its role in the global economy which should be specifically related to demographics. But how does it link in with the general narration of China in the global economy? Well, demographics are not destiny and you should not leave this note thinking that this is what I am advocating. However, there is mounting evidence that once fertility (TFR) drops into the 1.5 region and stays there for a prolonged period the forces of demographics steadily and rapidly begin to take center stage as one of the main macroeconomic explanatory variables.

In China's case this becomes rather preoccupying. In this way and if we return to my introductory remarks I would argue that the rapidly changing demographic profile of China quite simply is at odds with all those changes we believe China is to make in order to, as least partially, lead the process of global macroeconomic adjustment. In fact, there may be a rather worrying precedent for the process China is now set to enter. If we consequently peer a bit to the West from the Chinese mainland we run into Russia and then further on the Eastern European economic edifice. What we have seen in this region since the end of 1980s is a process by which these countries have been in a veritable race against time to move up the value chain fast enough to escape the burden of completely lopsided demographics as fertility collapsed in the beginning of the 1990s and outward migration steadily began to drain their labour markets (Russia is an exception here). This process is now set to come to a very abrupt standstill prompted by the simple fact that these countries are now out of road in terms of having qualified labor to continue to process.

Moreover, the process itself has been one which rampant inflation and wage costs have followed in the heels of the build-up of large negative external positions. And what is at the heart of this then? Well, surely it is not all about demographics but in the main I think it is. In essence these countries have quite simply not had the demographic profiles to support the massive expectations of growth opportunities which were vested on them in an external context and whatever importance we ascribe to institutional reform (and nobody can argue that this is unimportant) the speed by which this has happened has left traditional reforms completely helpless in keeping up.

Allow me then to end this piece on a rather ominous note. I don't deny for a minute that China needs to correct, not for a minute and 'yes Virginia, exchange rates do indeed matter'. However, the global economy also has a distinct stake in not allowing China to enter on a road like the one we have seen in Eastern Europe. It takes a strong back bone to act as the global importer of last resort and at the heart of that backbone is a strong demographic profile. Yet, if China now is on the path of engaging in a breathtaking race against time to fulfill the obligations to become the new consumer driven nation of the world we at least need to look at what the potential consequences could be. One common fallacy in this respect would be how an appreciation of the Yuan would have a mitigating effect on inflation and overheating pressures. Of course, this is what theory tells us and I think that everybody can see that a revaluation is badly needed at this point. But such an adjustment process would also require that China invested more of its reserves in the domestic economy as well as foreign money and goods would come pouring in at a pace which itself could stoke a lot of bubbly tendencies. At the end of the day, I may be too pessimistic here.

Recent data out of China show that income is growing and that domestic demand is booming as a consequence. That is good. But if the process is too fast and too abrupt lingering inflation is likely to take hold and that would not be welcome by any standards. In a more immediate context I have this year's Olympic games as a sort of litmus test. There is no doubt that China will race through this at her traditional pace but what happens afterwards?

Post script ...

If we leave aside the rather dubious point that Chinese women are programmable robots who can actually be submitted to such a transition we also need to consider the speed with with the current process is moving along. The suggestion above simply denotes an understanding of the demographic transition which is wholly out of sync with the way it actually works in the real world. I won't be picking extensively on this paper and if anything we should be acknowledging the fact that this is actually narrated as a problem which needs to be addressed. Yet, we also need to understand that given the trajectory of China's demographics and its rampant growth rates any actions, on this front, taken in a post 2015-2020 perspective will literally be subject to such long term projections before they may have a concrete effect that it does not, in a scientific or policy related context, makes sense to discuss their merits.
So what the hell am I getting at here?
In the main, I have tried to take sketch, or take proprietorship of, the part of the discourse on China's economic development and its role in the global economy which should be specifically related to demographics. But how does it link in with the general narration of China in the global economy? Well, demographics are not destiny and you should not leave this note thinking that this is what I am advocating. However, there is mounting evidence that once fertility (TFR) drops into the 1.5 region and stays there for a prolonged period the forces of demographics steadily and rapidly begin to take center stage as one of the main macroeconomic explanatory variables.

In China's case this becomes rather preoccupying. In this way and if we return to my introductory remarks I would argue that the rapidly changing demographic profile of China quite simply is at odds with all those changes we believe China is to make in order to, as least partially, lead the process of global macroeconomic adjustment. In fact, there may be a rather worrying precedent for the process China is now set to enter. If we consequently peer a bit to the West from the Chinese mainland we run into Russia and then further on the Eastern European economic edifice. What we have seen in this region since the end of 1980s is a process by which these countries have been in a veritable race against time to move up the value chain fast enough to escape the burden of completely lopsided demographics as fertility collapsed in the beginning of the 1990s and outward migration steadily began to drain their labour markets (Russia is an exception here).

This process is now set to come to a very abrupt standstill prompted by the simple fact that these countries are now out of road in terms of having qualified labor to continue to process. Moreover, the process itself has been one which rampant inflation and wage costs have followed in the heels of the build-up of large negative external positions. And what is at the heart of this then? Well, surely it is not all about demographics but in the main I think it is. In essence these countries have quite simply not had the demographic profiles to support the massive expectations of growth opportunities which were vested on them in an external context and whatever importance we ascribe to institutional reform (and nobody can argue that this is unimportant) the speed by which this has happened has left traditional reforms completely helpless in keeping up.

Allow me then to end this piece on a rather ominous note. I don't deny for a minute that China needs to correct, not for a minute and 'yes Virginia, exchange rates do indeed matter'. However, the global economy also has a distinct stake in not allowing China to enter on a road like the one we have seen in Eastern Europe. It takes a strong back bone to act as the global importer of last resort and at the heart of that backbone is a strong demographic profile. Yet, if China now is on the path of engaging in a breathtaking race against time to fulfill the obligations to become the new consumer driven nation of the world we at least need to look at what the potential consequences could be. One common fallacy in this respect would be how an appreciation of the Yuan would have a mitigating effect on inflation and overheating pressures. Of course, this is what theory tells us and I think that everybody can see that a revaluation is badly needed at this point.

But such an adjustment process would also require that China invested more of its reserves in the domestic economy as well as foreign money and goods would come pouring in at a pace which itself could stoke a lot of bubbly tendencies. At the end of the day, I may be too pessimistic here. Recent data out of China show that income is growing and that domestic demand is booming as a consequence. That is good. But if the process is too fast and too abrupt lingering inflation is likely to take hold and that would not be welcome by any standards. In a more immediate context I have this year's Olympic games as a sort of litmus test. There is no doubt that China will race through this at her traditional pace but what happens afterwards?

Post script ...

China and her economy obviously commands much attention in the general debate and as always it is difficult to find time to read everything. I suggest you go for quality then. Brad Setser and his global imbalances watch is a must and even though Brad and I have our little exchange rates v demographics argument I still think that he is indispensable. Another author you need to read here is Michael Pettis (who recently had a guest posting spell on Setser's blog). Michael writes exclusively on China and you would be hard pressed to find a better one-stop source. Finally, this small space tracks the quarterly journal China in the World Economy as well as Edward and I have our small China Economy Watch which will be updated on an ad-hoc basis.

Too Little Pork, Too Much Money, Or Both of These Plus Too Few People To Work The Land, To Grow The Pork, To Move The Money.......?

2008-03-17T10:56:00.008+01:00

The yuan today climbed yet one more time to its highest level (against the dollar, but not of course against the yen or the euro) since China its peg in the summer of 2005 as the central bank stepped up efforts to curb inflation which is currently running at an 11-year high. China has so far permitted a 3.4 percent gain in the currency so far this year, almost half the advance for the whole of 2007, as it seeks to cut the cost of imported goods and slow export growth. The precipitating factor in today's rise was yesterdays decision by the People's Bank of China that banks should set aside more reserves. According to the new ruling banks must now place a record 15.5 percent of deposits with the central bank, up from the previous 15 percent. This is the second time this year it has done this foolwing ten similar hikes last year (all but one of which were by 50 bp) , and, although the increase is not especially large, it does give us some indication of the difficulty the central bank is encountering in its ongoing effort to slow down expansion in China's money supply.

One indication that such measures may well fall far short of what is needed is provided by today's movement in government bonds, which gained after the finance ministry sold 10- year notes at a yield which was sloghtly lower than the market generally anticipated. The finance ministry auctioned 27.9 billion yuan ($3.95 billion) of the securities at 4.07 percent, compared with the 4.1 percent general estimate among analysts. The yield on the 4.16 percent note due in February 2023 also fell 3 basis points to 4.17 percent, according to the China Interbank Bond Market. The price of the bonds was up 0.34 per 100 yuan face value to 99.9. All of this suggests there is still very ample liquidity left in the system, and considerable "draining" yet to do.

The yuan was up by 0.26 percent on the back of the news - to 7.0630 to the dollar - as of 5:30 p.m. in Shanghai, the biggest gain so far this month, according to the China Foreign Exchange Trade System. The currency has so far climbed around 0.6 percent in March alone. However gains in the yuan have trailed behind some other Asian currencies over the past month, suggesting the central bank may have been intervening to slow its appreciation. The yuan has risen 1.2 percent against the dollar in the period, while the yen has gained 8.3 percent and the Taiwan dollar 3.3 percent. Obviously the yen is a somewhat special case, since the unwinding of the carry trade is an important part of the picture here, but still a rather greater increase in the yuan could really have been expected.

China's stocks rose, giving the CSI 300 benchmark index its biggest increase in six weeks. Yuan-denominated A shares listed on China's two exchanges, gained 124.91, or 3.3 percent, to 3,888.86 at the close today. This is the biggest rise since Feb. 4, and follows hard on the heels of a five-day, 15 percent loss. Only yesterday the index tumbled 5.1 percent yesterday - to its lowest since July 16 - after Premier Wen Jiabao said the government will take "forceful" measures to battle inflation. In more general terms the index is now down by about 40% from its November peak.

Obviously, as I keep signally, inflation is definitely the biggest worry, with consumer prices rising at an 8.7 percent annual rate in February, the fastest pace in 11 years, as wahes continued to increase at a 20% plus annual rate, and food and energy prices held steady to their long upward march.

Michael Pettis over at China financial markets blog had a relevant posting on the inflation front yesterday. Alongside a detailed analysis of the breakdown of the inflation data, he reports on the February wholesale price index reading which was released yesterday. February wholesale prices were up 9.2% year on year and 1.1% month on month (which amounts to an annualized 14%). Thus inflation is at this point well engrained inside the system.

As Michael notes we do have some quite stunning differences in the components of price inflation. Foodstuffs - which constitute some 33% of the basket - increased by 23.3 percent year-on-year. Of the foodstuffs total, the price of meat, poultry and associated products surged 45.3 percent (of which, that pork component which has attracted so much of ken Rogoffs attention increased 63.4 percent).At the same time price deflation persisted in other areas. The price of clothing declined 1.4 percent year-on-year, while the price of garments alone dropped by 1.6 percent. The price of durable consumer goods was up a mere 0.8%, while household services, maintenance and renovation (which is of course very labour intensive) were up 8.5. Not surprisingly communication services were down by 19.9%.

Housing costs were up by 6.6 percent year-on-year, and included in this category are the price of water, electricity and fuels, building and decoration materials, and renting, which were up 6.5, 5.9, and 4.5 percent respectively. What this indicates - when we consider these price rises along with the rise in wages - is that second round effects are now well into the system, following a pattern which is all too familiar already from Russia and Eastern Europe.

But given the great variance in prices we seem to have structural constraints in some areas and not in others. Agriculture seems to be the bigggest issue, given the percentage of additional income that Chinese families are liable to spend on food. So what is happening?

Well perhaps one clue is provided in another piece of information which Michael has dug out for us from the pages of the People's Daily;

Tian Chengping, Minister of Labor and Social Security, said on March 9 that there are 24 million job-seekers in cities and towns every year, including the new additional urban workforce and the people carried over from the previous year who did not find work. But there are only a little more than 12 million jobs available in cities and towns every year. Approximately 8 million additional rural laborers move into cities and towns every year; and this phenomenon will continue for quite some time. The current employment situation remains grim.

Tian Chengping said that in the future, we should promote employment in six ways that include regulating and controlling unemployment; establishing an early warning system for unemployment; and making efforts to maintain stable employment conditions.

So what we may well have here are some rather important structural mismatches between jobs on offer and the people who are applying to do them. I do find it hard to see how there can be year on year wage increases in the 20 percent plus range if there are serious surplus labour pressures.

What we have are 8 million people flooding into the cities and towns from the countryside every year, and 12 million jobs being created there. What this means is that you can have a backlog of people already in the cities who are finding it difficult to obtain work, some of them being unemployed of over one years duration. But just how many of the over one year unemployed people are actually employable? This is a question which we have been having to ask in country after country across Eastern Europe, and I doubt the situation is that different in China.

What there may be are a lot of people over 40 (for example) underemployed, or something like that, there may also be too many people arriving in some urban areas looking for work for those areas to absorb, while in other areas - and especially some rural ones - severe shortages develop. Some of this then gets knocked on to the food prices issue.

But this "buffer overflow" in the urban labour market is not at all inconsistent with labour shortages in other areas of the economy, particularly in the rural ones, where in fact food prices may be rising due to the unavailability of sufficient labour to work the land intensively enough, and the very low productivity of labour which can't simply be changed overnight. If this is the case then the "pork barrel inflation" (my apologies to Ken Rogoff) may well be about more than money and only money. As he admits why we didn't get inflation before in China, given that the monetary conditions were already present, is rather surprising:

Inflation of more than 6 per cent is the immediate problem. Those who think inflation is caused by too little pork rather than too much money are wrong. China’s relatively pegged exchange rate system has led the authorities to flood the economy with renminbi. ... The real surprise is that inflation did not sprout earlier. The authorities must stuff the inflation genie back in the bottle. It is not going to be easy...

Could it be that before living standards hadn't risen far enough or fast enough, and that there was still sufficient surplus labour out there in the heartlands, surplus labour which - like that legendary liquidity over at Paribas on the 9th August last - has suddenly and astonishingly evaporated as the Olympic driven boom finally takes the system near to breaking point. Remember that the Economist reported that 7 million people failed to return to work in the "growth hothouse" Guandong region after this year's New Year holiday. So could it be that despite all that excess liquidity there are now be deep seated structural questions lying behind China's recent inflation surge. Some additional evidence for this is provided by a paper that Claus Vistesen dug out and reported on in this post.

Basically in the February 2008 issue of the journal "China and the World Economy" Fang Cai (Director of the Institute of Population and Labor Economics, Beijing) and Meiyan Wang publish a paper entitled "A Counterfactual Analysis on Unlimited Surplus Labor in Rural China". Here is the abstract.

Using a counterfactual analysis approach, the present paper examines a host of conventional wisdoms relating to issues of farmer, the countryside and agriculture, which are believed to be all originated from the existence of mass surplus laborers in China. When analyzing various sources of statistics, evidence shows that there is no longer a large pool of surplus laborers in rural China as most people believe. Based on this counterfactual result, all related events, such as the direction of agricultural technological changes, the level of comparative productivity of agricultural labor, and the degree of rural-urban income gap must be reconsidered.

So what this suggests is that China may indeed be finding it difficult to increase food production due to rural labour shortages which are a direct consequence of the one child per family policy. What I feel is that if this view is right we shouldn't be treating increasing food prices as a temporary blip in inflation, since the shortage of rural population (and the low productivity of Chinese agriculture given the labour quality of what is left) and the increasing living standards of the urban population is going to put an upward pressure on prices for some time to come. Add to this labour shortage generated pressures on wages and you are into all sorts of problems.

Evidently, given they will continue to need to increase the volume of food imports, letting the yuan rise can ease the internal inflationary pressure, but this will only result in exporting Chinese inflation out into global food prices for the rest of us. So really, you could say you are going to see the direct impact of thirty years of one child per family policy sitting right on your dinner plate.

Postscript

Those interested in a more growth-theoretically oriented explanation of the argument in this post may find my "Has China's Economic Growth Passed It's Peak? post well worth reading.

And for a fuller explanation of the inflation dynamics problem in another context see my "Inflation in Russia: Too Much Money Chasing Too Few People?".

Also of general interest are my "China's Inflation and Labour Shortage Problem, It's The Fertility Stupid!" and Claus Vistesen's "China's Economic Development - People ... I see no People"

China Fixed Asset Investment February 2008

2008-03-14T11:18:00.004+01:00

China's sending on factories and property rose at an annual rate of 24.3 percent in February, maintaining pressure the Chinese administration to try to prevent the world's fastest- growing major economy from overheating.

Fixed-asset investment in urban areas rose to 812.1 billion yuan ($115 billion) year on year, according to the latest data from the Chinese statistics bureau. The rate was also up slightly from the 23.4 percent pace achieved in January and February 2007.

The worst snowstorms in half a century failed to prevent a 33 percent jump in spending on real-estate development. China may now move more strongly to allow appreciation of the yuan, to raise interest rates and to increase bank reserve requirements after inflation in February accelerated to an 11-year high.

The yuan rose today to its highest level since the fixed exchange rate peg was ended in 2005. It traded at 7.0864 versus the dollar as of 3:42 p.m. in Shanghai up from 7.0900 yesterday. At the same time the CSI 300 Index of stocks fell 1 percent for the sharpest weekly decline since the index was introduced in April 2005, amidst growing concern that the government is about to raise interest rates. The People's Bank of China lifted borrowing costs six times in 2007 and has pushed banks' reserve requirements to 15 percent, the highest ever. The key one-year lending rate is currently at 7.47 percent.

The rate of investment compares with the 25.8 percent increase for the whole of 2007, but this years economic statistics for January and February this year have been distorted by the recent blizzards, making it harder to evaluate the effects of what the government terms its "tight" monetary policy.

Inflation shot up to 8.7 percent in February. Producer prices, the cost of goods as they leave the factory, also rose at the fastest pace in three years. Retail sales climbed the most in nine years, partly on rising prices.

Weaker export growth illustrated the threat that slowing global economic growth may represent for China. Overseas shipments rose last month at the slowest arte in five years, cutting the trade surplus, as demand in the United States waned. Money-supply growth also slowed, while industrial production expanded in the first two months by the least in a year.

The acceleration in property investment - up by 32.9%, an increase from the 30.2% pace for the whole of 2007 - even after the government tightened land-use rules, raised mortgage costs and increased down payments is bound to represent a cause for concern.

Non-metal minerals investment surged 61 percent in the first two months from a year earlier, coal jumped 31 percent, and oil and natural gas rose 9.8 percent. Spending on electricity production fell 3.7 percent.

China Industrial Output February 2008

2008-03-13T14:46:00.002+01:00

China's industrial output grew at the slowest pace in over a year in January and Fenruary as exports cooled and the worst snowstorms in half a century closed factories and disrupted power supplies. Output rose 15.4 percent in January and February from a year earlier, the statistics bureau said today, after gaining 17.4 percent in December.

Industrial production may be slowing in China, but it still grew at almost triple the pace of the increase in India, the world's second fastest-growing major economy, in January, and we need to see what happens in March and April when hopefully there will be no snow blizzards or similar so we can get a true picture of what is happening.

Chinese Premier Wen Jiabao told lawmakers last week that inflation and overheating are the nation's biggest economic risks this year. Consumer prices surged 8.7 percent in February on food costs.

Slowing global growth, a U.S. housing recession and an international credit crunch may all combine to put a break on China's expansion by curbing the demand for Chinese exports. Money-supply growth cooled in China in February as the trade surplus narrowed 64 percent and exports rose 6.5 percent compared to Fenruary 2007. This was the slowest pace in almost six years.

The People's Bank of China lifted borrowing costs six times in 2007 and raised bank reserve requirements to 15 percent, the highest ever. China has also let the yuan appreciate more quickly (although many would argue not quickly enough) to reduce import costs. The currency has climbed 2.9 percent this year versus the dollar following a 7 percent gain in 2007.

China Retail Sales February 2008

2008-03-12T16:04:00.007+01:00

China's retail sales climbed 20.2 percent in money terms in February accrording to the statistics bureau this morning, matching the fastest rate of nominal increase at least nine years. The increase for January and February was the same as that for December. It is important to remember, however, that this figure was boosted by the fastest inflation in 11 years.

If we strip out the monthly year on year increase in the consumer price index, however, things look a little different, and we no longer have the impression of steady acceleration, but rather it seems the rate of increased peaked - at least for the time being - in December.

Consumer-price inflation accelerated to 8.7 percent in February, underscoring the risk the world's fourth-largest economy will overheat after expanding 11.2 percent in the fourth quarter. Producer prices, the cost of goods as they leave the factory, rose 6.6 percent in February, the fastest pace in three years.

Jewelry sales rose 47 percent from a year earlier, grain and cooking oil climbed 41 percent, and petroleum jumped 40 percent. Furniture gained 26 percent, while automobiles surged 34 percent.

To foster domestic consumption, China is raising welfare payments and subsidizing farmers' purchases of televisions and refrigerators. Urban disposable incomes climbed to 13,786 yuan ($1,900) last year, while rural earnings rose 15.4 percent to 4,140 yuan.

Monetary policy is still incredibly loose in China with thre real interest rate being in negative territory (the real rate is the rate of interest after allowing for inflation. The key one-year deposit rate is 4.14 percent, less than half the current rate of inflation.

China Consumer Inflation February 2008

2008-03-11T10:41:00.014+01:00

China's inflation accelerated to its fastest pace in 11 years in February as the worst snowstorms in half a century disrupted food supplies, adding to pressure on the government to step up administrative measures to try and slow the economy and on the central bank to raise interest rates. Consumer prices climbed 8.7 percent in February from February 2007 following a gain of 7.1 percent in January, according to the statistics bureau in Beijing earlier today.

This is obviously very bad news indeed, and makes the Chinese problem look ominously like what we have been seeing in some East European economies and Russia. Obviously rising living standards which produce pressure on restricted global food prices don't help, nor does the strong flow of speculative funds entering China in the expectation of yuan revaluation. But to the discerning eye there is obviously a much more profound process at work here. The problem seems to be that China - despite its enormous size - is chewing up its labour reserves faster than new labour market entrants are arriving, and this is happening in large part due to the structural population break which has been produced by several decades of one child per family policy.

The issue is simply that China cannot continue to grow at anything like the double digit rate it has become accustomed to in recent years, in particular due to the growing constraints on labour supply. It should be remembered here that China has so far been focusing on low value work which is hugely labour intensive.

If you want some idea of what this means in practice, just look at this opening sequence from Jennifer Baichwal’s documentary "Manufactured Landscapes". And notice, apart from the scale of the enterprise, and the types of activity engaged in, the comparatively young age of most of the workers.

The New York Times's Keith Bradsher was in China last summer, and he pointed out that while there are no really reliable figures for average wages in China there is widespread evidence that factory owners and experts who monitor the labor market are noting how that businesses are having a hard time finding able-bodied workers and are having to pay the workers they can find ever more money.

For decades most labor economists saying that China’s vast population would supply a nearly bottomless pool of workers. So many people would be seeking jobs at any given time, this reasoning went, that wages would be stuck just above subsistence levels, probably for decades. As recently as four years ago, some experts estimated that most of the perhaps 150 million underemployed workers in the countryside would be heading to cities. The reality however has been quite different. Instead, from 2003 onwards sporadic labor shortages started to appear with growing intensity at factories in the Pearl River delta of southeastern China. Now those shortages seem to have spread to factories up and down the Chinese coast.

Only this week the Economist reports - in an article entitled Where is Everybody - that the vast annual migration of around 20m people that has been fuelling the manufacturing boom in southern China over the past two decades is rapidly diminishing.

The Guangdong Labour Ministry is reporting that 11% of the workers did not return after the January holiday period, and independent estimates put the number as high as 30%. Whatever the exact details, many factories are reeling. Wages were already rising (according to government figures by around 20% y-o-y) now they will surely go up further. Meanwhile, revenues are falling due to slowing demand from America and a reduction, following pressure from other countries, in China's complex system of export subsidies.

The Federation of Hong Kong Industries have also produced some gloomy looking figures. Members estimated 10-20% of the 70,000 factories in Guangdong province had closed in the past year, and they expected a similar number to close within the next two years. Two-thirds of those polled said they were unsure whether to invest more in the region; one-third planned to cut investment. Only one respondent was optimistic. As the Economist notes, not all of this is bad news by any means since to some extent the closures are the objective behin a recent government plan to force dirty, low-paying industries out of business or into poorer interior regions that have so far missed out on the country's growing industrial wealth. But then we have the inflation data, and we can see that there is more at work than a simple "facelift" operation.

When pressed Chinese officials are quick to say that there is no overall shortage of labor — rather, there is a shortage of young workers willing to accept the low wages that prevailed in the 1990s (see again the video clip above). Factories in cities like Guangzhou advertise heavily for young workers, even while employment offices consider it a success if someone over 40 can find any job in less than a year.

Keith Bradsher quotes Jonathan Unger, director of the Contemporary China Center at Australian National University in Canberra, to the effect that “Now they’re taking workers into their early 30s, but anything older than that and they think they can’t take the conditions, the 11-hour days.... as well as work on weekends, and a tedious life in factory-owned dormitories". and as Brasher says "Plant owners’ refusal to hire blue-collar workers over 35 or 40 is colliding with the demographic reality of China’s one-child policy". And on his vists to villages from tropical Gaoyao in the southeastern corner of the country to dusty Houxinqiu in the northeast, what he found most striking was how few young adults remained after so many had left for the cities. He cited a recent government survey of 2,749 villages in 17 provinces and autonomous regionswhich found that in 74 percent of villages, there were no workers fit to travel to distant cities. Of course this is what they are now noting in Guandong.

The Real Issue is Inflation and Rapid Growth

The big unknown in 2008 in China is what is going to happen happen to inflation. Most analysts are assuming that the application of a traditional set of policy measures - letting the yuan rise, raising interest rates at the central bank - will produce a very gradual slowdown in China. Having seen what I have seen in Eastern Europe, and looking at what is now happening in Russia, I have my doubts abou this.

The inflation problem they have is a very real one - as we are now seeing month after month -and at this point in time it is hard to see how they can adequately address it. Certainly unchaining the yuan could just as easily lead to an acceleration of inflows and an increase in the overheating problem as to any more benign outcome, and I would treat New Zealand (and India for that matter) as the "Canary in the Coalmine" (or if you prefer "smoking gun") here. So I would just like to put up a question mark on this count, and I would do this especially in the context of the underlying and strong structural break in the Chinese population pyramid which has been produced by many years of the one child per family policy. Looking at those other canaries - Latvia and Estonia (and then Russia) push-comes-to-shove time does seem to arrive a lot earlier than we had all been anticipating. As I say, 2008 could well be the year that inflation gets a hold on China. In which case the whole thing could simply continue overheating till it simply cannot anymore, and then we could see a quite severe slowdown, a slowdown which given China's size and growing economic importance could have an impact across the entire global economy.

The danger is that a feedback mechanism is created whereby rising wages (according to data from the statistics office Chinese wages are now rising at something like 20% year on year) feed into producer prices, which then feed into consumer price inflation, and so we go on. Certainly this weeks producer prices data was hardly reassuring, since producer prices climbed 6.6 percent in February, the fastest pace in more than three years, giving us yet one more indication that the "cheap Chinese labour" global disinflation process most likely has now come to an end.

What we really need to be noting here is the fact that China's demographic trajectory is virtually unique, especially in terms of economic growth and China's demographic transition, since it is surely the case that China was getting some sort of demographic dividend or other (in terms of having an increasing proportion of the population in the workforce) well before the recent growth wave really took off in the late 1990s.

What we do know is that from the late 1990s onwards China systematically introduced a very extensive labour and financial market reform process, and this certainly has served to unlease a huge amount of pent-up potential both interms of labour supply and sectoral shifts in economic activity, and it is this which has given us the sustained growth since the turn of the century.

What is interesting to note is how the recent uptick in inflation coincides almost exactly with the peaking of the 15 to 19 age group, as you can see in the chart below, and it is important to note that the decline in this age group will now continue as far ahead as the eye can see, and especially over the next several years is really going to be quite dramatic, as you would expect from the drastic one chile per family "torniquet" policy which was applied.

I have selected the 2022 horizon looking forward based on the fact that this is now known data. We can predict with a reasonable degree of accuracy just how many 15 year olds there will be in China in 2022, since they have now already been born. So we have a pretty good idea of China's new labour supply going forward. Obviously China can still get considerable growth by relocating the existing workforce across sectors to more productive ones. But the end of the labour intensive low economic value growth must now surely be in sight, and the big question is can China sustain inflation-free growth of the order of magnitude we have been seeing in recent years, bearing in mind that much of the recent growth in many of the higher growth developed economies - the US, the UK, Ireland, Spain - has been very labour intensive. My feeling is that it can't, this is why all those exhausted canaries swooning in Latvia have been so useful, and that we will see a slowdown in China which will not simply be cyclical, but rather structural. Possibly the moment of inflection (or tipping point) here will come around the time of the Olympic Games.

So, as I say the 15 to 19 age group has now peaked in China, and from here on in it is essentially downhill all the way, as far ahead as anyone can see. The truth is that no-one at this point in time knows what the consequences of this are going to be. But don't worry, since at least one thing is for sure: we are all just about to find out.

Postscript

Those interested in a more growth-theoretically oriented explanation of the argument in this post may find my "Has China's Economic Growth Passed It's Peak? post well worth reading.

And for a fuller explanation of the inflation dynamics problem in another context see my "Inflation in Russia: Too Much Money Chasing Too Few People?".

China Trade Surplus February 2008

2008-03-10T10:57:00.003+01:00

China's trade surplus fell for the first time in almost a year in February as the worst blizzards in half a century disrupted the flow of shipments at the same time as demand from the Unietd States weakened.

The surplus was down by 64 percent in February from a year earlier, to a level of $8.56 billion, according to data released by the Chinese customs bureau.

Exports rose year on year by 6.5 percent, which was the slowest rate of increase in almost six years.

For the first two months of the year combined, the surplus was down 29 percent (at $28 billion) over january-February 2007. Imports, on the other hand, were up 35.1 percent in February, which was the biggest gain in more than three years. A significant part of the increase was the result of higher prices for commodities such as crude oil, iron ore and soy beans.

In January, exports rose 26.6 percent and imports climbed 27.6 percent.

It would be wrong to place too much importance on the change in the rate of surplus increase at this stage since China was swept by snowstorms in mid-January, and these will have delayed deliveries to ports and disrupted production at manufacturing companies. Also China's week-long Lunar New Year holiday also started earlier this year than last, leading exporters to bring some shipments forward to January. Another factor which will have contributed to the lower rate of export growth will have been abnormally high - 52 percent y-o-y - rate increase in February 2007, when exporters were pushed shipments through early to beat tax increases.

On the other hand import growth is likely to stay strong since China will continue to need materials for utility, railway and housing projects and for reconstruction work after the snowstorms.

Inflation is also busily creeping up. China's producer prices climbed 6.6 percent in February, and this was the fastest pace in more than three years, according to data from the statistics office today.

The consumer price inflation figure will be released tomorrow and many economists expect China to further raise interest rates, which are already at a nine-year high, possibly within days,.

The yuan traded near its highest level since the direct dollar peg ended in July 2005 on speculation the government will allow further gains in the value of the currency to help combat inflation. The yuan was at 7.1069 per dollar as of 4:15 p.m. in Shanghai, compared with 7.1110 on March 7.

China Inflation January 2008

2008-02-19T14:03:00.006+01:00

China recorded an inflation rate above 7 per cent in January – the highest in more than 11 years and providing evidence of entrenched inflationary pressures.
Consumer prices rose 7.1 percent in January from a year earlier, the statistics bureau said today, after gaining 6.5 percent in December. January's consumer prices climbed 1.2 percent from December.

Widespread expectations of a significant jump in retail inflation had been reinforced yesterday when manufacturing producer prices hit a three-year monthly year-on-year high of 6.1 per cent, mainly as a result of winter transport bottlenecks and higher commodity prices.

There are signs that global inflationary pressures have been fuelling higher Chinese food prices. Global prices for top-quality spring wheat - for example - have jumped by 90 per cent in the past six weeks, as corporate consumers have scrambled to secure supplies and speculators have bought stocks. The rising cost of pig feed is another example, and pork prices climbed 59 percent, edible oil 37 percent and vegetables 14 percent. Even more preoccupying is the fact that this process might now endure well into the year – creating a further headache for Chinese policymakers.

The breakdown of the CPI is also interesting, food, with a weighting of about 25%, is obviously important, and the price of foodstuffs increased 18.2 percent. Of this total, the price of grain was up by 5.7 percent.

On the other hand clothing was down by 1.9 percent year-on-year. The price of household facilities, articles, and maintenance services rose by 2.1 percent year-on-year. Of which, the price of durables rose by 0.7 percent, but household services and upkeep surged by 10.7 percent.

The price of health care and personal articles increased 3.2 percent year-on-year. The price of western medicines increased by only 0.5 percent, while that of traditional Chinese medicinal materials and medicines was up by 11.4 percent.

The price of transportation and communication dropped 1.1 percent, with transport alone dropping 2.9 percent. Communication prices fell by 19.6 percent. The price of recreational, educational and cultural articles decreased 0.3 percent. Of which, price of tuition and child care increased 0.5 percent; that of teaching materials and reference books dropped 1.3 percent; that of expenditure of culture and recreation increased 2.1 percent; that of tourism and outgoing was up by 5.1 percent; and that of cultural and recreational articles dropped 0.7 percent.The price of articles related to residence expanded 6.1 percent over the same period of the previous year. Of which, price of water (5.5%), electricity (5.7%) and fuels (4.7%) all up strongly.

Inflation has soared since last year on food and fuel costs, but it is important to note that wages were rising by a very rapid 22% on a national basis in Q3 2007, and a surging money supply increasingly poses the risk that these price gains may become self-propelling.

The threat of enduring inflation will add significantly to the pressures on Beijing to allow an even faster appreciation of its tightly managed currency. Food prices soared 18 percent after blizzards paralyzed transport systems and destroyed crops. The government faces the challenge of curbing inflation without derailing the expansion of the world's fastest-growing major economy

The renminbi, which has risen by about 13 per cent against the US dollar since mid-2005, has been rising more rapidly recently, in-creasing at an annualised rate of about 19 per cent in January.

As a result, China’s central bank is, technically, losing billions of dollars a month on the foreign exchange reserves it invests in US dollar instruments because it is paying higher rates at home on renminbi bank bills than it is getting in the US. The key one-year lending rate is 7.47 percent.

With interest rates on the back burner, a higher renminbi has become an important weapon for the government to fight inflation, by lowering import costs of oil and other commodities as well as soyabeans. Eighty per cent of soyabean imports are used for pig feed.

Although higher Chinese costs and currency appreciation will inflate its export prices, China is still importing inflation rather than exporting it at the moment, say economists.

“If anything, what is happening in the US is affecting China rather than the other way around,” said one Beijing-based economist is quoted as saying.

Foreign Investment in China January 2008

2008-02-18T10:41:00.004+01:00

Foreign direct investment in China more than doubled in January from a year earlier, adding to the flood of cash that threatens to overheat the world's fastest- growing major economy. Spending by overseas companies and individuals climbed 110 percent to $11.2 billion, according to data released by the Ministry of Commerce today. In whole year 2007, investment increased 13.6 percent to $74.8 billion the Ministry said.

Meantime in separate news we learn today that China's producer prices rose at the fastest pace in more than three years as energy costs surged, adding pressure for more government measures to tame inflation. Factory-gate prices increased 6.1 percent in January from January 2006, according to data from the statistics bureau.In December the PPI rose a y-o-y 5.4 percent.

The producer price of crude oil surged 29.9 percent in January from a year earlier and that of ferrous metals soared 17.3 percent. Food prices jumped 10.4 percent.

China's trade surplus jumped 23 percent in January from a year earlier to $19.5 billion. Money supply rose 18.9 percent, the biggest gain in 20 months. The People's Bank of China raised interest rates six times in 2007 and has ordered lenders to set aside more deposits as reserves on 11 occasions since the start of last year, pushing the ratio to 15 percent, the highest ever. The central bank has also sold bills to drain cash from the financial system and capped banks' loan growth.

Government restrictions and higher taxes aren't deterring investors from ventures in the world's fourth-biggest economy. The government is also steering investment away from the eastern coastal cities and into less-developed regions in the west and the center. The country's five-year plan, running through 2010, also aims for a shift from assembly work to designing and producing high-technology brands.

China's economy, the world's fourth largest, expanded 11.4 percent in 2007 from a year earlier, the fastest pace in 13 years.

China Trade Surplus January 2008

2008-02-15T08:47:00.003+01:00

China's trade surplus jumped 23 percent in January (as compared with January 2007) to $19.5 billion, the state-run Xinhua News Agency reported today. This is bound to stoke up the continuing controversy about the ongoing surplus, and doesn't indicate that the Chinese economy has been slowing significantly at this point. China is trying to slow growth in its surplus to prevent inflows of cash from export sales from stoking inflation that's close to an 11-year high.

Exports rose 26.7 percent from a year earlier, the biggest increase in six months, to $109.7 billion, while imports increased 27.6 percent, the largest gain in almost two years, to $90.2 billion.

But compared to previous months, the surplus shrank. It was the first time since April 2007 that China reported a monthly trade gap below $20 billion. In December, it totaled $22.7 billion, and in October it reached an monthly record of $27 billion.

China Number One Exporter To US in 2007

2008-02-14T18:57:00.002+01:00

China passed Canada to become the largest source of products shipped into the U.S. last year, capping a six-year period during which its exports to the U.S. more than tripled. Led by items such as flat-panel televisions and computers, household appliances, toys and clothing, imports from China surged to $321.5 billion in 2007, according to a US Commerce Department statement today. Chinese trade is accelerating faster than imports from did Mexico after the North American Free Trade Agreement took effect in 1994.

China's rapid rise may well produce an even stronger backlash in the US Congress where lawmakers have systematically complained that China subsidizes its producers at the expense of U.S. companies and workers.

China also passed Mexico last year to become the second- largest trading partner with the U.S. after Canada. As recently as 2002 Mexico sent more goods to the U.S. than China. Now, Chinese totals are 50 percent more than Mexican exports to the U.S. And the rise of China doesn't mean trade with Canada is falling: imports from Canada increased 3 percent last year, despite the rise in the Canadian dollar. Imports from China jumped 12 percent compared with 2006.

Chinese exports to the U.S. were rising steadily through the 1990s. They spiked after China entered the World Trade Organization in December 2001 and after global caps on apparel trade expired at the end of 2004.

Has China's Economic Growth Now Passed It's Peak?

2008-02-10T20:35:00.000+01:00

Is the annual rate of Chinese growth now about to slow, not just temporarily, but may it actually be that the long march of Chinese "catch-up" growth is now finally slowing? This is the question that was asked by the Financial Times earlier this week, and, as they point out, it may well be that behind those headline forecasts for decelerating Chinese output in 2008 there lies a deeper and more significant trend that may mark the arrival of the long-awaited turning point in the trajectory of the Chinese economy.

Certainly both local Chinese and World Bank economists have significantly downgraded their forecasts for China’s 2008 growth in recent weeks – down from 11.4 per cent rate achieved in 2007 to around 9 to 9.5% this year. But more importantly, could the 11.4 per cent expansion in 2007 – the fifth consecutive year of double-digit increase – represent the peak point in headline growth for China's economic development process. That is, after falling back this year, will Chinese growth ever climb back to its previous heights, and even if it doesn't , should this fact be producing concern among us?

On the face of it, it is obvious that noone - not even China - can continue growing at double digit rates forever, and at some stage the cycle of growth will fall steadily back towards the much lower rates traditionally associated with a developed economy. The big question is really, has that point now been reached?

To get an idea of what we are talking about, and of what all this might this mean, perhaps it is interesting to take a quick look at the longer term growth patterns of some other economies who have been through the "accelerated greenhouse" catch-up growth that China is currently enjoying. Perhaps a good place to start would be with South Korea, since South Korea is arguably the South East Asian "tiger" which is most similar to what Chinese economic evolution might look like, since Singapore, Taiwan and Hink Kong are, each in their own way, very special cases.

Now as we can see from the above chart, South Korean was at one point very strong indeed, until growth "peaked" around 1987 (at 11.1%) and since that time growth has followed a more normal cyclical pattern, with the important detail that with each successive cycle Korean growth has slowly and inexorably slowed ("stripping out" the very exceptional sharp decline and rebound produced by the Asian crisis in 1998).

Economic growth for an emerging economy tends to show this kind of profile since in general terms there are both technological and demographic components in "catch up" economic growth - although there may actually be no such thing in reality as a constant steady state rate to catch up with as I try to argue here - and once most of the technological gap has been closed and the benefical momentum of arriving at maximum proportions of the population in the highly productive 25 to 50 age group begins to pass, economies then seem to eshibit a steady loss of momentum rather like air escaping from a pinprick in a gas balloon, as we can see in the cases of the two oldest societies on the planet, Japan and Italy, in the charts below.

Now I have singled out Italy and Japan (the profile for France, or the UK, or the US is really quite different) since they are both late economic developers, and also since their subsequent demographic transition to ultra low fertility has been very rapid, as it is about to be South Korea and China. Hence Japan and Italy have experienced very rapid ageing, and we already know China is about to follow them down this road, at what may well be an even more rapid pace. In fact China may well, thanks to the presence of a forced restriction of fertility, a reasonably high level of life expectancy and a virtually negligible impact from inward migration as we move forward, become the most rapidly ageing society the world has so far seen.

The comparative median age charts for China and South Korea give the general picture. When we get to 2020 China will still be significantly younger than South Korea, but is following the same trajectory. By 2020 Korea will be nearly as old as the three oldest societies - Germany, Japan and Italy - currently are, and will in all probability be older than slower ageing societies like the UK and France. The is a very dramatic change for a newly developed country.

Chinese Growth

So what do we know about growth to date in China? Well, lets look at the longer term chart.

Now when we come to look at this chart, we immediately face a number of important problems. The first and most obvious one is that the further back in time you go prior to 2000 the more unreliable the data is. So the fact that the maximum growth period seems to be in the mid 1980s, followed closely by the mid-1990s burst might, at first sight, seem strange, since it is the growth spurt which China has enjoyed post-1998 which has really been the most convincing. But it should be noted that China's demographic trajectory is virtually unique, and it is the case that it was getting some sort of potential demographic dividend or other well before 2000, so while the earlier data most probably does not give a complete picture, perhaps it would be a mistake to disregard it altogether. Of course, the more credence we give to the 1980s growth, the more we have to reach the conclusion that some significant slowing down or other may well be at hand, since following the trajectory of the line would suggest it. But as I say, maybe we shouldn't give too much credence to earlier data, so we need to be carfeul with this kind of argument.

What we do know is that from the late 1990s onwards China systematically introduced a very extensive labour and financial market reform process, and this certainly has served to unlease a huge amount of pent-up potential, and it is this which has given us the sustained growth since the early 1990s which has only been accompanied by one small dip between 1998 and 1999 (again the Asian crisis).

Now if we think about the currently rather fashionable coupling-decoupling arguments in this context, it is clear that China was effectively "decoupled" during the 2001 internet bust global slowdown, since it kept growing regardless. That is to say there is evidence that China was much more affected by events in surrounding Asia in 1998 than it was by the recession in the G7 in 2001/2002.

There are of course plenty of reasons for taking the view that things may not be the same this time round. China is evidently much more "locked-in" to global dynamics due to its systematically increased share in world trade. Also China was much more able during to trade increasing its market share for slowing overall world growth during the last recession, by using its price leverage - due to all that pent-up unused labour - but again there are reasons (and especially the domestic inflation ones) for thinking that things may not be quite the same this time. This would be doubly the case if China has been able to extend the post 1998 wave beyond its natural duration by taking advantages of the global imbalances situation, and its own currency and price leverage, to extend its export growth beyond what might be considered the normal sustainable extent. Basically I am very suspicious when I see such extended growth with virtually no humps, like we get in the Chinese case. As we can see for the other charts, growth should be more wave like, so we should at least ask ourselves what it is that has been going on?

The Intractable Inflation Problem

So the big question is when will the current wave come to an end, and when could we expect China to follow in the footsteps of South Korea and show us that steady but constant reduction in annual growth rates. Well... looking at the chart, and sticking my neck out, and also making some sort of back of the envelope estimation about how intractable the inflation problem may turn out to be (and of course recent Eastern European and Russian experience is relevant in this context), my feeling is we may well find China starting to slow this year, and the process continuing next year, and the one after etc - with the normal and anticipated ups and downs. So the Financial Times may well be right when it suggested that Chinese growth may slow and never quite be the same again, but there are grounds for thinking that they may perhaps have only captured part of the picture, and the grounds for thinking this are that they do not appear to have factored in population, labour market and inflation dynamics, and the ineveitable interaction of the three of them.

Certainly Chinese growth from now on is going to be constantly pushing up against limits which are increasingly set by the level of inflation. The inflation problem China has is a very real one, and at this point in time it is hard to see how they can adequately address it. Certainly the popular remedy - unchaining the yuan - could just as easily lead to an acceleration of capital inflows and a further increase in the overheating problem as to any more benign outcome, and I here I would suggest we treat New Zealand (and India for that matter) as the "Canaries in the Coalmine" (or if you prefer "smoking guns"). Conventional monetary policy is up against very clear limits at the present juncture.

And the recent resort to administrative measures seems almost destined to fail - as it is failing in the Russian case - since the problem is not a temporary one produced by high oil and food prices (which are anyway in part a by-product of Chinese growth), but is now becoming more endemic and structural. In the face of the present inflation surge the Chinese government has been gradually widening price controls, and finally took the plunge and froze all food prices last month while at the same time clamping limits on fertilizer prices and raising price supports for rice and wheat. These controls are meant to shield China's poor and working classes, who spend up to half their incomes on food. But the inflation spike is blamed on shortages of pork and grain, and it is obvious that putting a lid on prices simply shifts the hardship over to the farmers, discouraging them from raising output, and thus in the medium term reducing output and putting even more upward pressure on prices.

The recent extreme weather has only exacerbated the problem. In order to ease electricity shortages, thousands of trainloads of coal were rushed to power stations and hundreds of mines were kept running through the Lunar New Year holiday. But with the price of coal now forecast to climb by anything up to 100 percent this year, Beijing has yet to say how power companies will cope.

So I am really not that clear that China has any easy way out of the present inflation dynamic - and remember this is a huge change from the moment when China was reportedly "exporting deflation to the rest of the world", a process which at best has lasted from 1998 to 2007, but is unlikely to continue in the same way. In addition there is now significant evidence of labour market tightening in some parts of the Chinese economy. Wages and salaries of employees went up in the 3rd quarter of 2007 - the latest quarter for which we have data - by 22% (and by 27.2% if we take the private sector alone). And there are significant regional differences, with wages in the private sector in Beijing rising by 36.4% year on year. Even subtracting inflation these are sill very high rates of increase in real wages, and are surely not compensated for in their entirety by productivity increases. So China is steadily losing its competitive edge.

Clearly given the very low level from which Chinese wages started, and the restrained growth in the value of the yuan, it is possible to absorb to some extent such increases. The problem is that they may go on and on, and even accelerate.

And The Growing Difficulties In Finding Young Labour

The reason I say that we should expect worse to come in this regard is due to the underlying strong structural break in the Chinese population pyramid, a break which has been produced by many years of one child per family policy. Looking at those other canaries we have sent down the collective coalmine - Latvia and Estonia (and then, of course, Russia), then it does seem that push-comes-to-shove much sooner than any of us had been anticipating in the question of labour market tightening in the key 15 to 24 age group. In a way these could be thought of as the labour market equivalent of "first time buyers" in the housing market, since they tend to set the rates for others higher up the ladder. And just in case you have difficulty imagining how a country with a 750 million odd labour force could possibly have labour shortages, just remember that this labour force has been growing at an annual rate of 6 or 7 million to sustain the double digit growth rate, and even China can't find the additional people to keep explanding its labour force at this rate forever. And in particular it can't with generational cohorts which will soon be much smaller than those exiting the labour force at the upper age end, and with participation rates in the 15 to 24 age group bound to fall as people go for more and higher levels of education. Maybe it is worth bearing in mind here, that size doesn't mean you have less labour supply problems, au contraire you have more as time passes, and it is no accident in this regard that Russia and the US are the two countries with the largest annual migration needs. In theory we might expect the Chinese economy when it finally becomes the largest in the planet to also be the world's largest consumer of economic migrants, but this scenario hardly seems plausible.

As I say, 2008 could well be the year that inflation really gets a hold on China. Certainly the strong uptick in the latter months of 2007 is evident, as can be seen in the chart below.

Curiously this uptick coincides exactly with the peaking of the 15 to 19 age group, as you can see in the chart, and the decline in this age group from here moving forward is really quite dramatic, as you would expect from the drastic policy measure which was applied.

I have selected the 2022 horizon looking forward based on the fact that this is now known data. We can predict with a reasonable degree of accuracy just how many 15 year olds there will be in China in 2022, since they have now already been born. So we have a pretty good idea of China's new labour supply going forward. Obviously China can still get considerable growth by relocating the existing workforce across sectors to more productive ones. But the end of the labour intensive low economic value growth must now surely be in sight, and the big question is can China sustain inflation-free growth of the order of magnitude we have been seeing in recent years, bearing in mind that much of the recent growth in many of the higher growth developed economies - the US, the UK, Ireland, Spain - has been very labour intensive. My feeling is that it can't, this is why all those exhausted canaries swooning in Latvia have been so useful, and that we will see a slowdown in China which will not simply be cyclical, but rather structural. Possibly the moment of inflection (or tipping point) here will come around the time of the Olympic Games.

So, as I say the 15 to 19 age group has now peaked in China, and from here on in it is essentially downhill all the way, as far ahead as anyone can see. The truth is that no-one at this point in time knows what the consequences of this are going to be. But don't worry, since at least one thing is for sure: we are all just about to find out.

China Q4 2007 GDP Growth and Inflation

2008-01-24T10:59:00.000+01:00

China's economy expanded at an anuual rate of 11.2% percent in the last quarter of 2007, making this the fourth straight quarter of 11% plus quaterly year-on-year growth. Gross domestic product grwoth was down slighly in the three months ending Dec. 31 when compared with 11.5 percent in the third quarter,according to data from the statistics bureau in Beijing today.

Inflation also slowed slightly to a 6.5 percent annual pace in December, but this is still double the central bank's annual target. The rate reached an 11-year high of 6.9 percent in November. China, which semed poised to become the biggest contributor to global growth this year, is at risk of experiencing a sudden slowdown since inflation fears are leading to the introduction of ever stronger restrictions on bank lending.

Morgan Stanley economist Wang Qing is widely quoted as making the point that "Tightening too much when the U.S. is heading for a recession would be a double hit for the global economy" but he also points out that inflation is becoming a critical challenge for the Chinese, and hence the global economy.

The yuan traded at 7.2253 per dollar at 11:25 a.m. in Shanghai, from 7.2250 before the report. The yield on the 2.8 percent government bond due in March 2016 was little changed at 4.35 percent.

Currency gains may become a more important tool for cooling the economy this year after six interest-rate increases in 2007 and the raising of banks' reserve ratios to a 20-year high. A stronger yuan would lower import costs, push up export prices, and curb inflows of cash from record trade surpluses. The currency's gains versus the U.S. dollar accelerated to almost 3 percent in the fourth quarter, compared with a 7 percent pace for all of last year. It is now up more than 14 percent since the fixed exchange rate regime ended in July 2005.

China is evidently much less likely to push its one-year lending rate beyond a nine-year high of 7.47 percent following the unexpected Federal Reserve decision to cut its benchmark interest rate by 75 basis points to 3.5 percent earlier this week. The reason is obvious - the risk of attracting "hot money" via the well worn path of the carry trade. This would thus risk increasing the overheating pressure and fuelling inflation rather than reducing it.

China's economy grew 11.4 percent in 2007 from a year earlier, the fastest pace in 13years, to 24.7 trillion yuan ($3.4 trillion). China accounted for 17 percent of global growth in 2007, the same as the U.S. according to United Nations estimates, and is poised to overtake Germany as the world's third-biggest economy sometime this year.

Consumer prices rose at a 4.8 percent annual rate in 2007, tripling the 2006 pace the statistics bureau also said.

Consumer prices rose more quickly in the countryside than in cities last year and the gap between rural and urban incomes widened. Urban disposable incomes climbed 17.2 percent from a year earlier to 13,786 yuan ($1,908), while rural earnings rose 15.4 percent to 4,140 yuan.

Factory and property investment in urban areas climbed 25.8 percent in 2007 from a year earlier, the statistics bureau said, up from the 24.5 percent pace in 2006. Industrial output rose 17.4 percent in December, up from 17.3 percent in November.

The government has some fiscal leverage with which to stimulate the economy should the economic dynamic suddenly shift from boom to bust. Tax revenue soared 31 percent last year to 4.94 trillion yuan and potentially rising domestic consumption offers another shield. Retail sales climbed 20.2 percent in December from a year earlier, the fastest pace in at least nine years, although this was in nominal terms, and thus partly due to inflationary price increases. But subtract 5% for inflation, and you still come in with a year on year rise of about 15%.

The big unknown in 2008 in China is what will happen to inflation. Most analysts are assuming a very gradual slowdown in China. Here I have my doubts. The inflation problem they have is a real one, and at this point in time it is hard to see how they can adequately address it. Certainly unchaining the yuan could just as easily lead to an acceleration of inflows and an increase in the overheating problem as to any more benign outcome, and I would treat New Zealand (and India for that matter) as the "Canary in the Coalmine" (or if you prefer "smoking gun") here. So I would just like to put up a question mark on this count, and I would do this especially in the context of the underlying and strong structural break in the Chinese population pyramid which has been produced by many years of the one child per family policy. Looking at those other canaries - Latvia and Estonia (and then Russia) push-comes-to-shove time does seem to arrive a lot earlier than we had all been anticipating. As I say, 2008 could well be the year that inflation gets a hold on China. Certainly the strong uptick in the latter months of 2007 is evident, as can be seen in the chart below.

Curiously this uptick coincides exactly with the peaking of the 15 to 19 age group, as you can see in the chart, and the decline in this age group from here moving forward is really quite dramatic, as you would expect from the drastic policy measure which was applied.

I have selected the 2022 horizon looking forward based on the fact that this is now known data. We can predict with a reasonable degree of accuracy just how many 15 year olds there will be in China in 2022, since they have now already been born. So we have a pretty good idea of China's new labour supply going forward. Obviously China can still get considerable growth by relocating the existing workforce across sectors to more productive ones. But the end of the labour intensive low economic value growth must now surely be in sight, and the big question is can China sustain inflation-free growth of the order of magnitude we have been seeing in recent years, bearing in mind that much of the recent growth in many of the higher growth developed economies - the US, the UK, Ireland, Spain - has been very labour intensive. My feeling is that it can't, this is why all those exhausted canaries swooning in Latvia have been so useful, and that we will see a slowdown in China which will not simply be cyclical, but rather structural. Possibly the moment of inflection (or tipping point) here will come around the time of the Olympic Games.

So, as I say the 15 to 19 age group has now peaked in China, and from here on in it is essentially downhill all the way, as far ahead as anyone can see. The truth is that no-one at this point in time knows what the consequences of this are going to be. But don't worry, since at least one thing is for sure: we are all just about to find out.

China's December Trade Surplus Slows

2008-01-11T13:02:00.000+01:00

China's trade surplus droped for the second consecutive month in December as export growth slowed, signaling that China's economic exansion may now have peaked. The surplus for December shrank to $22.7 billion from $26.2 billion in November, the Chinese customs bureau today. Exports grew at the slowest pace in two years, indicating that recent yuan gains, the cooling global expansion and cuts to export-tax incentives on polluting industries are beginning to bite. For 2007, the trade gap surged 48 percent to a record $262.2 billion, giving U.S. and European officials ammunition to keep calling for faster appreciation of the yuan.

Shipments rose 21.7 percent in December to $114.4 billion, compared with last month's 22.8 percent and the slowest since December 2005 excluding distortions from Lunar New Year holidays in January and February.

Imports climbed 25.7 percent in December to $91.7 billion, maintaining the previous month's 25.3 percent pace of expansion.

After the figures were released, the yuan rose to the highest since a dollar peg was scrapped in 2005, trading at 7.2620 per dollar at the close in Shanghai. The currency, which advanced for a fifth week, has climbed 14 percent since the link was scrapped. The CSI 300 Index of shares rose 0.5 percent to the highest since Oct. 17.

The yuan advanced 7 percent against the dollar in 2007, twice as fast as in 2006, partly because the central bank boosted interest rates to a nine-year high.

China's economy expanded 11.5 percent in 2007, the fastest pace in 13 years, according to government forecasts.
China reduced export-tax incentives twice last year on products including pig iron and nickel. New tax rules to slow exports of some other steel products that took effect on Jan. 1 may cool shipment growth further. Steel-product exports fell 14 percent in December from a year earlier.

Government policy makers last month named inflation and the risk that the economy will overheat as its two main concerns for 2008 and said the People's Bank of China would pursue a ``tight monetary policy.''

The policy is designed to slow the rate at which cash has been funneled into building thousands of factories, many of which may become idle should export demand dwindle too fast.

Policy makers are trying to prevent the economy from overheating in the face of risks that global growth will stall and slash demand for Chinese-made goods.

China's money-supply grew at the slowest pace in seven months, evidence that central bank measures to cool inflation and prevent the economy from overheating are beginning to work.

M2, the broadest measure of money supply, rose 16.7 percent to 40.3 trillion yuan ($5.55 trillion) from a year earlier, the central bank said today on its Web site. The pace slowed from November's 18.5 percent.

The central bank has been trying to stem the flood of money into the economy from a record trade surplus to slow the fastest inflation in 11 years and curb investment. The bank is likely to take more measures to limit credit because money supply growth is still more than the 16 percent target set for last year.

China's foreign-exchange reserves, the world's biggest, rose 43 percent to a record $1.53 trillion at the end of 2007 from a year earlier, today's central bank statistics showed.

As well as six interest rate increases last year, the central bank has raised the amount of money banks must set aside as reserves to a 20-year high and directed banks to limit lending.

Merry Xmas and A Happy New Year

2007-12-25T00:03:00.001+01:00

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.

Credit crunch, did someone use the expression credit crunch?

Slight Easing in China's Output Growth

2007-12-14T09:49:00.000+01:00

From Bloomberg this morning:

China's factory and property spending growth slowed, another sign that government lending curbs may be starting to cool the world's fastest-growing major economy.

Fixed-asset investment in urban areas rose 26.8 percent in the first 11 months from a year earlier, the statistics bureau said today, after gaining 26.9 percent through October. Economists calculated November's increase at about 26 percent, down from October's 30.7 percent.

Industrial output grew at the year's slowest pace in November, outstanding loans rose the least in eight months and export growth stayed at reduced levels. Those signs may do little to ease central bank concern the economy is overheating after inflation surged to an 11-year high and the trade surplus swelled.

``It's a slight moderation in connection with the tightening efforts but growth is still very strong,'' said David Cohen, an economist at Action Economics in Singapore. ``Another interest-rate increase before the end of the year would be consistent with avoiding overheating.''

The yuan traded at 7.3712 at 12:07 p.m. after closing at 7.3692 yesterday. The yield on a 15-year bond was little changed at 4.72 percent.

The median estimate of 18 economists surveyed by Bloomberg News was for a 26.6 percent increase in 11-month investment.

Nuclear Reactors

Investment in the oil and natural-gas industries rose 9.6 percent through November, a slower pace than the 12.3 percent gain in the first 10 months. Railways and transportation also had weaker growth.

Spending in the first 11 months rose to 10.1 trillion yuan ($1.4 trillion), more than the size of Canada's gross domestic product last year. China's projects include plans to become the world's biggest producer of nuclear reactors, building about 30 of them by 2020.

``It's too early to call it a slowdown -- we need three months of data,'' said Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai. He predicts three interest-rate increases next year, more investment controls, and a faster pace of yuan appreciation that will slow inflows of cash from exports.

Investment accounted for 42.5 percent of China's gross domestic product in 2006, compared with 24 percent in Japan, 20 percent in the U.S. and 17 percent in Germany. The number of new projects rose by 24,124 from a year earlier to 211,127 in the first 11 months, the National Bureau of Statistics said today.

Exports, Industrial Production

More than two-thirds of Chinese enterprises say their industries have overcapacity, the state-run Xinhua News Agency reported Nov. 11, citing a government survey. Textile, pharmaceutical and equipment manufacturing were cited as examples.

Industrial output grew 17.3 percent in November from a year earlier. Outstanding local-currency loans climbed 17 percent.

Export growth slowed to 22.6 percent for the past four months from the 29 percent pace through July because of cuts to tax incentives, weaker U.S. demand, and higher prices due to currency gains and production costs.

Spending on fixed assets is ``too rapid'' and has ``become a prominent problem,'' the State Council, or cabinet, said last month. The pace of growth has rebounded this year from the 24.5 percent increase in 2006 and means that new factories may come on stream just as global growth slows, leaving overcapacity, falling profits and bad loans.

The government is targeting inflation that surged to 6.9 percent last month and overheating as the biggest threats to an expansion that has been the biggest contributor to global economic growth in 2007.

China has raised the key one-year lending rate to a nine- year high of 7.29 percent, clamped down on bank lending, tightened project approvals, imposed environmental restrictions and limited land use to curb investment.

China Inflation November 2007

2007-12-11T12:28:00.001+01:00

China's inflation accelerated at the quickest pace in 11 years and the trade surplus swelled, adding pressure on the central bank to raise interest rates and let the currency appreciate faster to cool the economy. Consumer prices rose 6.9 percent in November from a year earlier after climbing 6.5 percent in October, the statistics bureau said today.

Surging food and fuel costs and a record $238 billion surplus in the first 11 months have prompted the government to name inflation and overheating as the biggest threats to growth. U.S. Treasury Secretary Henry Paulson is in Beijing to press for yuan gains that would narrow the trade gap and staunch the flow of money into the world's fastest-growing major economy.

The yuan gained by the most in a month against the dollar. The currency, which has climbed 12 percent since a fixed exchange rate was scrapped in July 2005, rose 0.22 percent to 7.3792 per dollar as of 4:46 p.m. in Shanghai from 7.3952 late yesterday. It touched 7.3770, the highest since the end of the dollar link.

The People's Bank of China last week ordered lenders to set aside 14.5 percent of deposits as reserves, up from 13.5 percent. China's one-year lending rate is at a nine-year high of 7.29 percent after five increases this year.

The trade surplus climbed 14.7 percent to $26.3 billion in November from a year earlier, the third-biggest monthly total, the customs bureau said today. The $15.2 billion trade surplus with the U.S. pushed the 11-month total with that country to $149.2 billion.

China's money-supply growth exceeded the central bank's annual target for a 10th straight month as a ballooning trade surplus pumped cash into the world's fastest- growing major economy.

M2, the broadest measure of money supply, rose 18.5 percent to 40 trillion yuan ($5.4 trillion) in November from a year earlier, the People's Bank of China said today on its Web site.

China's Inflation Problem

2007-12-09T22:45:00.000+01:00

From Bloomberg today:

China's inflation probably held at the its highest level in more than a decade, adding pressure on the central bank to raise interest rates for a sixth time this year or let the yuan appreciate faster.

Consumer prices rose 6.5 percent in November from a year earlier, according to the median estimate of 21 economists surveyed by Bloomberg News. That's unchanged from October's pace, the fastest since December 1996. The statistics bureau will release the figure at 10 a.m. tomorrow.

China on Dec. 8 ordered banks to increase reserves by the most in four years, three days after government said it would shift to a ``tight'' monetary policy among measures to cool the world's fastest growing major economy. U.S. Treasury Secretary Henry Paulson, who visits Beijing this week, recommends faster appreciation of the yuan to tame price increases.

``China's policy makers are facing a red hot economy with galloping inflation and asset prices,'' said Daniel Melser, an economist at Moody's Economy.com, a unit of Moody's Investors Service in Sydney. ``The best way to combat inflation would be to loosen the leash on China's tightly managed currency.''

In the latest move to limit credit, the central bank will require lenders to put aside a record 14.5 percent of deposits, starting Dec. 25, up from the previous 13.5 percent.

The increase, which was twice as much as the nine others this year, ``reflects the urgency of inflation concerns of the government,'' said Liang Hong, an economist at Goldman Sachs Group Inc. in Hong Kong.

China To Strengthen The Dollar?

2007-12-09T08:55:00.000+01:00

From Bloomberg this morning:

As U.S. Treasury Secretary Henry Paulson visits China this week to push for faster appreciation of the yuan, the bigger issue may be what China is doing to strengthen the dollar.

Paulson's fifth trip to the nation as Treasury Secretary has taken on added urgency as the U.S. grows more dependent on the dollar's decline to lift exports and keep the economy out of recession. While the pace of the yuan's gains tripled in the past 15 months, Chinese officials now plan to increase investments in America that may boost the U.S. currency instead.

``China at this stage needs to be looking to opportunities provided by the weakening U.S. dollar,'' Ha Jiming, chief economist in Beijing at China International Capital Corp., the nation's largest investment bank, said in an interview last week. ``Very recently the government is becoming more interested in channeling money out of the country.''

The Ministry of Commerce said last week it will encourage businesses to buy American assets. Twenty insurers were granted licenses to invest overseas. China Investment Corp., the nation's $200 billion sovereign wealth fund, said it will be a ``stabilizing force'' in markets rocked by credit losses, signaling it may invest in American banks.

``We just started the going-out strategy,'' said Xia Bin, director of financial research at the State Council Development Research Center, which reports to the nation's cabinet. ``It is helpful to reduce yuan appreciation pressure in tandem with other measures, like blocking inflows of speculative money,'' he said in a Dec. 7 interview.

`Rush to Invest'

The combination of a trade surplus that reached $27 billion in October and rising foreign investment increased currency reserves ninefold this decade to $1.46 trillion, according to data compiled by the People's Bank of China.

At the same time, inflation rose to a 6.5 percent rate in October, the fastest in a decade, and regulators are concerned that the country's financial markets are a bubble waiting to burst. The benchmark CSI 300 Index of stocks in Shanghai and Shenzhen jumped 147 percent this year, pushing prices to more than 45 times per-share earnings, more than double that of Hong Kong's Hang Seng Index.

``The biggest issue in Asian markets starting from 2008 will be China's rush to invest overseas,'' said Park Hyo Jin, a strategist in Seoul at Good Morning Shinhan Securities Co. The firm is a unit of Shinhan Financial Group Co., South Korea's second-largest finance company by assets.

The yuan strengthened 11.9 percent since the end of the fixed exchange rate with the dollar in July 2005, including 8 percent since Paulson became Treasury Secretary in July 2006.

`Pace of Change'

The cost to buy yuan in 12 months with forwards fell 1.4 percent last week to 6.8075 per dollar, the biggest decline in three months. The spot rate for the currency dropped 0.04 percent to 7.4030, and declined 0.3 percent on Dec. 6, the most in one day since the peg was scrapped. It rose 0.15 percent to 7.3922 at 11:29 a.m. Shanghai time.

Paulson will try to show in the Dec. 12-13 meetings that a stronger currency will help restrain consumer prices. Chinese officials agree with the ``principle'' that they need a more flexible exchange rate, Paulson said in an interview Dec. 7. A currency that responds to market signals would help China control inflation. ``The pace of change has accelerated,'' he said. ``They need to move it more.''

``The U.S. wants a strong yuan, but what about the dollar being so weak?'' said Binay Chandgothia, who oversees $2 billion as chief investment officer at Principal Asset Management Asia in Hong Kong. ``This will form part of the posturing in the discussions.''

Strong Dollar

Paulson has been consistent in saying a strong dollar is in the nation's interest at the same time that the U.S. Dollar Index, which measures the currency's performance against six of its biggest trading partners, fell to 74.48 on Nov. 23, the lowest since it began trading in 1973. The index, down 8.7 percent for the year, rose 0.1 percent today to 76.33.

The depreciating dollar has helped American exports rise to records in the seven months through September, the longest streak since 2000, Commerce Department data show.

Exports rose to $140.1 billion in September, a bright spot in an economy suffering the worst housing slump in 16 years. The trade deficit narrowed to $56.5 billion in September from the record $67.6 billion in August 2006 as a falling dollar made American goods cheaper in foreign markets.

Record Deficit

The U.S. deficit with China, though, is set to exceed last year's record of $232.5 billion, prompting lawmakers including Senator Charles Schumer, a New York Democrat, to propose sanctions unless the yuan gains at a faster pace. U.S. growth may slow to 1.9 percent in 2008, compared with 10 percent forecast for China, the International Monetary Fund in Washington said.

The nation's leaders have growing incentives to help the dollar appreciate. China owned $396.7 billion of Treasuries as of September, up from $71.4 billion in 2000, according to the Treasury Department. Among foreign nations, only Japan, with $582.2 billion, owns more U.S. government debt.

China Investment ``wants to be a stabilizing force in the international capital markets'' just as other sovereign wealth funds have been, Chairman Lou Jiwei told a conference in Beijing on Nov. 29.

Overseas acquisitions by Chinese companies climbed to almost $28 billion this year, compared with $19 billion in all of 2006, according to data compiled by Bloomberg. The government has approved funds to raise the equivalent of $42.2 billion to invest abroad as of Sept. 30, according to central bank data. In July, the nation's insurers were allowed to invest 15 percent of an estimated $300 billion of assets in foreign currency holdings.

Initial Steps

Initial steps to invest abroad had mixed results. U.S. lawmakers in 2005 blocked an $18.5 billion bid by Hong Kong- based Cnooc Ltd., the country's biggest offshore oil producer, for El Segundo, California-based Unocal Corp. In May, China Investment, the sovereign wealth fund, bought $3 billion of shares in New York-based Blackstone Group LP. The value of the holding has fallen by $1 billion.

Blackstone is planning a bid for Rio Tinto Group, the world's third-largest mining company, that may include China Investment, the Daily Telegraph reported today. Spokespeople for China Investment, Rio and Blackstone all declined to comment.

In October, New York-based Bear Stearns Cos., the second- biggest underwriter of U.S. mortgage bonds, sold a $1 billion stake to state-owned Citic Securities Co., based in Beijing.

`Various Risks'

``Not many Chinese companies have made successful investments overseas so far,'' said Lian Ping, chief economist at Shanghai-based Bank of Communications Ltd., the nation's fifth-biggest state lender. ``We should push outbound investments further, but need to watch various risks.''

Forward contracts suggest the yuan will gain 8.7 percent over the next 12 months, compared with 5.9 percent in the past year. Some investors say they'd be surprised if the gains are that large.

``The market is expecting too much in terms of what China may do after Paulson's visit,'' said Wee-Ming Ting, who helps manage $2.4 billion of global emerging market debt as head of Asian fixed income at Pictet & Cie in Singapore and invests in yuan forwards.

Is the Lending Slowdown Biting?

2007-12-09T08:48:00.000+01:00

From the FT today:

China loan curbs hit businesses

By Henny Sender

Published: December 9 2007 16:32 | Last updated: December 9 2007 16:32

In the Chinese river city of Fuling, where Hong Kong’s Noble Group has a soybean crushing operation, the barges continue to unload their cargo of soybeans to be turned into meal and cooking oil and sold on to customers.

But in recent weeks, some of those customers have been doing something new, company officials say: asking Noble to provide them with credit because they can no longer obtain financing from their banks.

But what with one hand you take away, with the other you give:

China raises foreign investment quotas

By Sundeep Tucker in Hong Kong, Geoff Dyer in Shanghai and Richard McGregor in Beijing

Published: December 9 2007 22:06 | Last updated: December 9 2007 22:06

China is to treble the amount of money that foreigners can invest in the mainland capital market, making the long-awaited announcement on the eve of this week’s high-level economic summit between Chinese and US policymakers.

The State Administration of Foreign Exchange, the country’s foreign exchange regulator, said on its website on Sunday that the quota for registered foreign investors would be increased from $10bn to $30bn. It could take several months before institutional investors secure fresh quotas.

The announcement will be welcomed by foreign investors, who have been lobbying for greater access to the mainland’s booming stock market, and comes amid signs Beijing is poised to permit further foreign investment in the domestic securities industry.

The Financial Times reported last week that Credit Suisse and Morgan Stanley had each signed agreements with Chinese partners to establish mainland investment banking ventures – the first such moves since a moratorium on further foreign involvement in the sector was introduced two years ago to protect local firms.

Citigroup, Merrill Lynch and JPMorgan are among the other US investment banks discussing potential partnerships with mainland securities firms, though foreign bankers believe new ventures will be not allowed to operate in some lucrative business areas.

Beijing is expected to point to the twin developments to placate the US delegation, led by Hank Paulson, US Treasury secretary, which has been lobbying China on a number of fronts since the so-called Strategic Economic Dialogue began last year.

Beijing agreed in principle to expand the quota for the Qualified Foreign Institutional Investors scheme at a previous round of bilateral talks in May, though it held back implementation because of a surge of capital trying to enter the country.

The flagship index on the Shanghai market has fallen by about 15 per cent in the past month, though it has still doubled this year.

In an indication of how lucrative the Chinese capital market has been to the 49 institutions which have secured QFII licences, the regulator said on Sunday that the value of their securities had risen to Rmb200bn ($26.5bn) from the initial investment quota of $10bn.

News of the revised quota was welcomed by Chris Ruffle, co-chairman of MC China, a subsidiary of Martin Currie, a UK-based fund manager and largest foreign investor in A-shares.

Mr Paulson is still expected to come under pressure from US investment banks to ensure that new securities ventures will be allowed to trade mainland stocks.

Beijing is expected to permit Credit Suisse and Morgan Stanley to each acquire a 33 per cent stake in their ventures – the maximum allowed under the law. However, western bankers familiar with the thinking of Chinese authorities believe that the new securities ventures will only be granted licences to underwrite initial public offerings and not to trade domestic stocks.

Bear Market in China?

2007-11-28T09:28:00.000+01:00

From Bloomberg this morning:

China's stocks fell, taking the CSI 300 Index's decline from its Oct. 16 record close to more than 20 percent. Baoshan Iron & Steel Co. led steelmakers lower on speculation U.S. and European Union regulators will impose punitive duties on their Chinese imports.

China Minsheng Banking Corp. and China Merchants Property Development Co. led banks and real-estate companies lower after China Central Television said the government will take measures to slow expansion in fixed-asset investment.

The CSI 300 Index, which tracks 300 yuan-denominated stocks traded in Shanghai and Shenzhen, lost 59.05, or 1.3 percent, to 4,652.10 as of 2:29 p.m. local time, reversing an earlier gain of 1.1 percent. The measure has declined 21 percent since its record close on Oct. 16. Investors consider a 20 percent drop within 12 months as the signal of a bear market.

``Valuations are still very high and we're not quite ready to go back in just yet,'' said Leslie Phang, who helps manage $1 billion at Commonwealth Private Bank in Singapore, and has been reducing holdings of exchange-traded funds that track the Chinese A-share market.

About two stocks declined for each that climbed on the benchmark, with a measure of materials shares the biggest contributor to the drop. The gauge, which has advanced 128 percent this year, is valued at 42 times reported earnings, the highest in Asia, according to Bloomberg data.

China follows Japan among the world's 10 biggest stock markets to enter a bear market since the summer's U.S. subprime- mortgage collapse. The People's Bank of China has raised borrowing costs five times this year and Premier Wen Jiabao pledged last month to limit land use and tighten investment- project approvals.

In Japan....

Japanese stocks fell, led by Sumitomo Mitsui Financial Group Inc., after Wells Fargo & Co. announced a $1.4 billion pretax charge tied to increased losses on home equity loans.

Shares also declined after U.S. consumer confidence fell more than expected in November and housing prices dropped the most since at least 1988, pointing to weaker demand in Japan's biggest overseas market.

Fast Retailing Co. and Mitsubishi UFJ Financial Group Inc. slid after Japan's government lowered its assessment of the job market for the first time in three years.

``It looks like the trend for growing subprime-related losses at U.S. financial institutions is here to stay,'' said Kiyoshi Ishigane, who helps oversee $61 billion in assets at Mitsubishi UFJ Asset Management Co. in Tokyo. ``Japanese banks have declined because of weak domestic demand and as wages and employment stalled.''

The Nikkei slid 69.07, or 0.5 percent, to 15,153.78 at the close of trading in Tokyo. The Topix index slipped 3.14, or 0.2 percent, to 1,475.64.

Bridgestone Corp. led tiremakers and chemical companies higher after the price of oil slumped the most in two weeks, lowering production costs.

Sumitomo Mitsui, Japan's third-largest publicly traded bank, lost 22,000 yen, or 2.4 percent, to 880,000. Mitsubishi UFJ, the biggest, declined 16 yen, or 1.6 percent, to 1,014. T&D Holdings Inc., the nation's only publicly traded life insurer, slid 130 yen, or 2 percent, to 6,260.

Subprime Losses

Wells Fargo, the second-largest U.S. mortgage lender, said after the close of trading in New York it will take a charge to account for expected losses on home-equity loans as the U.S. housing market continues to deteriorate. The company's shares fell 4.7 percent in after-hours trading in New York.

Norinchukin Bank, the central credit provider to Japan's farmers and fishermen, said yesterday it had unrealized losses of 53.3 billion yen ($491.2 million) on 476.7 billion yen of subprime loan-related assets in the six months to Sept. 30.

The bank, which is not traded, had an additional 14 billion yen valuation loss in October on those investments.

``It's still too early to say'' that the credit crisis has passed, said Masafumi Oshiden, a fund manager in Tokyo at BlackRock Japan Co., whose parent company holds $1.1 trillion in assets.

U.S. Consumer Confidence

Toyota Motor Corp., which gets as much as 70 percent of its profit from operations from North America, lost 100 yen, or 1.6 percent, to 6,000. Komatsu Ltd., the world's second-largest maker of construction machinery, dropped 90 yen, or 2.9 percent, to 3,050.

The New York-based Conference Board said yesterday its consumer confidence index fell more than expected to 87.3 in November, the lowest level since 2005, as Americans struggled with surging fuel costs and falling home prices. House values dropped 4.5 percent in the third quarter from a year earlier, the most since records began in 1988, S&P/Case-Shiller reported separately.

Fast Retailing declined 240 yen, or 3.2 percent, to 7,230. J. Front Retailing Co., Japan's largest department store operator, fell 17 yen, or 1.7 percent, to 1,005.

Sales of clothing slid 1.3 percent in October, as mild weather reduced demand for jackets and sweaters, according to a report by the Ministry of Economy, Trade and Industry.

The Cabinet Office toned down its outlook on the job market after the unemployment rate rose for two months. ``Job-market conditions continue to be difficult and there has been a pause in improvement,'' the government said in its monthly economic report for November, published yesterday.

Cheaper Oil

Wages declined in nine of the 10 months to September and mid-year bonuses, about 10 percent of a worker's annual income dropped for the first time in three years.

Bridgestone, the world's second-largest tiremaker, gained 20 yen, or 1 percent, to 2,025. Sumitomo Chemical Co., Japan's No. 2 chemical maker by market value, jumped 30 yen, or 3.4 percent, to 922 yen.

Crude oil for January delivery extended declines for the second day falling 0.7 percent to $93.76 a barrel in the New York. The price fell 3.4 percent yesterday, the biggest drop since Nov. 13.

Oil explorers fell. Inpex Holdings Inc., Japan's biggest petroleum explorer, slid 50,000 yen, or 4.2 percent, to 1.13 million. Japan Petroleum Exploration Co., the second largest, declined 290 yen, or 3.3 percent, to 8,580.

Sony Corp., the world's second-largest consumer electronics maker, rose 190 yen, or 3.3 percent, to 5,940, completing its biggest three-day gain in almost two years after Dubai International Capital LLC said on Nov. 26 it bought a ``substantial'' stake in the company. The stock has advanced 13 percent over three sessions, the most since Jan. 2006.

Nikkei futures expiring in December lost 0.5 percent to 15,160 in Osaka and dropped 0.3 percent to 15,170 in Singapore.

Regulatory Measures For the Banks?

2007-11-19T09:25:00.000+01:00

From Bloomberg this morning:

China's banking regulator said it's giving ``guidance'' to banks to cool lending that's already topped its goal of 15 percent growth this year and threatens to overheat the world's fastest-growing major economy.

The China Banking Regulatory Commission denied a Wall Street Journal report today that it had ordered banks to freeze this year's lending at Oct. 31 levels. A 15 percent ceiling on loan growth is ``informal guidance, not a hard target,'' said Lai Xiaomin, the commission's Beijing-based spokesman.

Record trade surpluses have pumped cash into China, threatening to stoke inflation, asset bubbles and investment leading to overcapacity in manufacturing. The central bank has raised the benchmark one-year lending rate by 1.17 percentage points this year to 7.29 percent and ordered commercial lenders to set aside larger reserves.

``Reserve-ratio requirement hikes and rate hikes have not been able to slow bank lending growth this year,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``Therefore, the government has to rely on this non-market type of monetary policy tool.''

Chinese banks extended 3.5 trillion yuan ($471 billion) of new loans in the first 10 months, a 15.6 percent increase from loans outstanding at the end of last year, according to central bank data.

`Obstacles' for Banks

``Banks that exceed the 15 percent cap will face regulatory obstacles in applying for a new branch opening or new product lines,'' said Li Shanshan, a Shenzhen-based analyst at China Merchants Securities Co. ``Therefore, banks still have an incentive to obey what the government says.''

Lending is biggest early in the year ``so slower lending in the remaining two months won't have a significant impact on their bottom lines,'' said Li. Average loan growth of big state-owned banks this year is about 15 percent versus about 20 percent for small and medium-sized lenders, the analyst said.

The regulator last week told state banks to curb lending, citing the 15 percent target, according to the Shanghai Securities News. Another newspaper, China Business News, reported last week that overseas banks were told to tighten lending to real estate developers.

``We don't subject banks to hard-and-fast lending caps since individual banks have such different business needs,'' said the regulator's Lai. ``What we want is a reasonable pace of loans growth, dependent on each bank's capital-adequacy ratio, and the risk and quality of its loan portfolio.''

Accelerating Inflation

The central bank this month ordered lenders to set aside more money as reserves for the ninth time this year, raising the ratio to 13.5 percent, the highest since at least 1987.

The trade surplus widened to a record $27 billion in October.

Inflation last month jumped to 6.5 percent, matching August's rate, the highest in more than 10 years, on higher food prices. The benchmark CSI 300 Index of stocks has more than tripled in the past year even after declines since mid-October.

Government efforts to guide lending illustrate its reluctance to ``raise rates too much or let the yuan appreciate faster'' to curb liquidity, according to Wang Tao, head of economics and strategy for Greater China at Bank of America Corp. in Beijing.

The Chinese currency has gained more than 11 percent versus the dollar since the end of a fixed exchange rate in July 2005.

China Factory Spending Up 26% y-o-y

2007-11-16T10:48:00.000+01:00

From Bloomberg this morning:

China's growth in factory and property spending unexpectedly accelerated, stoking speculation the central bank will raise interest rates for a sixth time this year to cool the world's fastest-growing major economy.

Fixed-asset investment in urban areas rose 26.9 percent to 8.9 trillion yuan ($1.2 trillion) in the first 10 months of 2007 from a year earlier, the statistics bureau said today. That beat the 26.2 percent median estimate of 21 economists surveyed by Bloomberg News. The pace was 26.4 percent through September.

The central bank may raise the benchmark one-year rate from 7.29 percent as early as today after inflation matched a decade high in October and the trade surplus widened to a record. Surging factory spending increases the risk that China, the biggest contributor to global growth, will be left with idle factories, job losses and a supply glut if export demand slows.

``Macro controls will strengthen because the government wants slower investment,'' said Liao Qun, chief economist at Citic Ka Wah Bank in Hong Kong. ``Add the high inflation number and the chance of an interest-rate increase today or this weekend has got much bigger.'' He expects borrowing costs to rise as many as two times before year's end.

China's key rate, at a nine-year high after climbing 1.17 percentage points this year, compares with 0.5 percent in Japan, 4.5 percent in the U.S., 5 percent in South Korea and 5.75 percent in the U.K.

The yuan was little changed at 7.4233 versus the dollar at 3:57 p.m. in Shanghai. The currency has climbed 11.5 percent since the end of a fixed exchange rate in July 2005. The CSI 300 Index of stocks fell 1.5 percent on speculation that rates will rise, paring the benchmark's gains for the year to 145 percent.

Bigger Than Brazil

Economists calculated the increase in fixed-asset investment for October alone was more than 30 percent.

Spending through October exceeded the gross domestic product of the economies of Russia, Brazil or India. Investment has quadrupled since 1996 when the data was first released. It accounted for 42.5 percent of China's GDP last year.

The nation's projects include a $65 billion facelift for Beijing that includes a new airport terminal, subway lines and roads for next year's Olympic Games.

Spending in the non-ferrous metal industry jumped 33 percent in the first 10 months. Investment in non-metal minerals soared 54 percent. The number of new investment projects was 191,086, an increase of 22,518 from a year earlier.

``The economy risks overheating and more needs to be done in monetary policy tightening,'' said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong. ``There will be at least one more interest-rate increase this year and the central bank will be tougher in curbing loans.''

Borrowing Costs

The People's Bank of China is boosting this month the proportion of deposits that lenders must set aside as reserves to 13.5 percent, the most since at least 1987.

``A sharper-than-expected slowdown in global growth could curtail China's exports and expose the severity of its overcapacity problem,'' Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong, said in a report this month.

More than two-thirds of Chinese enterprises believe their industries have overcapacity, the state-run Xinhua News Agency reported Nov. 11, citing a government survey. Textile, pharmaceutical and equipment manufacturing were cited as examples.

China's economy may face ``a turning point'' if exports drop abruptly as a result of cooling overseas demand, Sheng Baofu, a Ministry of Commerce researcher, wrote in a Nov. 13 article posted on the ministry's Web site. Exporters mainly targeting the U.S. risk ``continuously shrinking'' orders, Sheng wrote.

Flood of Cash

That contrasts with government efforts now to tame the flood of cash from a trade surplus that reached $27 billion last month, stoking inflation, asset prices and investment.

Money supply grew 18.5 percent from a year earlier, exceeding the central bank's annual target of 16 percent for a ninth straight month. Consumer prices rose 6.5 percent on surging food costs.

China should raise rates and allow more currency appreciation, the World Bank said yesterday. Bigger yuan gains would staunch money inflows by pushing up export prices.

China is the biggest contributor to global growth this year, the International Monetary Fund said last month.

Global Slowdown and Chinese Exports

2007-11-16T10:43:00.000+01:00

From the FT this morning:

China’s commerce ministry warned on Thursday that a slowing US economy would trigger a drop in Chinese exports that would mark a “turning point” for China’s rapid economic growth.

A global economic slowdown stemming from problems in the US subprime mortgage market and the resulting credit squeeze “will be the biggest challenge to China’s economy next year”, a report from the ministry’s policy research department said.

The report is Beijing’s first public comment on what repercussions it expects from the global credit crisis and a sign that the government does not support the view that Asian growth has “decoupled” from the US. “If demand in the US drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders,” the report said.

Exports account for more than a third of China’s economic growth and 10 per cent of overall GDP, a radically different situation from just four years ago, when exports contributed nothing to headline growth figures.

Huang Yiping, chief Asia economist for Citigroup, said: “I agree with the government that a marked slowdown in the US would be very bad for China.

“We haven’t seen overcapacity or a so-called hard landing in China because it has been able to export all its excess capacity until now.”

The ministry’s report was pessimistic about the chances of avoiding a US and global slowdown, pointing out that although central banks in the US, Europe and Japan had taken numerous steps to alleviate the credit crisis, the situation had continued to deteriorate and “panic in the credit market remains”.

The US receives a fifth of all Chinese exports, making it the second-largest destination for Chinese-made goods after the European Union.

China’s central bank estimates that every 1 per cent drop in US economic growth translates into a 6 per cent fall in Chinese exports.

Exports to the US have slowed significantly since the start of the year, dropping from a 20.4 per cent year-on-year rise in the first quarter to a 15.6 per cent increase in the second. Growth fell to 12.4 per cent in the third quarter following the eruption of subprime loan problems.

The ministry said a combination of falling US interest rates and rising Chinese rates was limiting Beijing’s ability to rein in soaring property and stock market prices and inflation was running at its highest level in a decade. It also noted that continued turmoil in global financial markets could encourage greater capital inflows to China, straining the country’s financial and regulatory system and increasing inflationary pressure.

While potentially devastating for Chinese exports, a US slowdown could help reduce China’s soaring trade surplus, which hit a monthly high of $27bn in October, having increased more than 59 per cent to $212.4bn in the first 10 months from a year earlier.

Investment in China Accelerates

2007-11-16T10:39:00.000+01:00

From Reuters this morning:

Chinese capital spending in October rose at the briskest pace in over a year, rounding out a strong batch of monthly economic data and cementing expectations of a fresh rise in interest rates, possibly as early as Friday.

Capital spending in urban areas on fixed assets such as factories and power plants increased 26.9 percent between January and October compared with the same period last year, the National Bureau of Statistics said.

It was the fastest year-to-date pace since September 2006, eclipsing forecasts of a 26.3 percent rise and the 26.4 percent increase in the first nine months.

Economists calculated that investment spending in October alone was up 30.7 percent from a year earlier. JPMorgan Chase said that was the quickest monthly clip since June 2006.

"That makes an interest rate rise more likely today. Everybody in the market is now expecting it," Qiu Gaoqing, an analyst with Bank of Communications in Shanghai, said.

Shanghai stocks and the yuan eased on Friday as investors focused on the potential for higher interest rates.

The People's Bank of China (PBOC), the central bank, has already raised interest rates five times so far this year and ordered banks on nine occasions to hold more of their deposits in reserve instead of lending them out.

Mingchun Sun, an economist with Lehman Brothers in Hong Kong, agreed that a rate rise was on the cards.

"We expect one 27 basis-point hike by the end of this year, and it's possible that it could even happen today or tomorrow," he said.

China shifts its interest rates in increments such as 0.27 that are divisible by nine to make it easier for banks, which levy interest based on a 360-day year, to calculate the new payment changes.

A HOT ECONOMY

Chinese policy makers have been trying to cool over-investment for fear that excess supply will drive down profit margins and leave companies unable to service their debts.

"I'm pretty worried about this strong number because we think that the overcapacity issue is already a big problem, and this number is definitely making this more severe," Sun said.

The government has tightened land-conversion and environmental-protection rules, taking particular aim at industries that consume a lot of energy and spew out pollution.

Slightly softer factory output and export growth in October had prompted some economists to conclude that these measures might be biting. The investment report suggested they are not.

Capital spending accelerated in real estate, in smelting and pressing of non-ferrous metals such as copper, aluminium and zinc, and in non-metal minerals including cement.

Moreover, investment in new projects increased by 26.5 percent in the January-October period, up from 24.2 percent in the first nine months and just 6.4 percent in the first half.

Even after five rate rises, the one-year lending rate of 7.29 percent remains attractive given China's strong economic growth and fast-rising profits. Moreover, companies finance more than half of their investment from retained earnings, not bank loans.

The pick-up in investment follows figures earlier this week showing a record trade surplus in October; the sharpest rise in retail sales since the government started issuing the data in 1999; faster money and credit growth; and a rebound in consumer price inflation (CPI) to a nearly 11-year high of 6.5 percent.

Taken together, they leave the world's fourth-largest economy on track to grow by more than 11 percent for all of 2007, the fifth straight year of double-digit expansion.

"This higher investment number, plus a rebound in headline CPI and accelerating credit growth, should give the PBOC more than enough reasons for taking immediate tightening actions," said Qu Hongbin, HSBC's chief China economist.

He said he expected a rise of at least 0.27 percentage point as early as this week.

JP Morgan is also in the pack expecting an increase, but the bank struck a note of caution on the timing.

The rationale for a rise is to lift inflation-adjusted deposit rates -- now 3.87 percent for one year -- out of negative territory quickly to discourage people from investing their bank savings in the frothy stock market, economist Qian Wang noted.

"But with the domestic equity market already in correction mode, the urgency of an aggressive rate hike has been reduced," she said in a note to clients.

The stock market <.SSEC> was down more than 2 percent in early afternoon, partly in anticipation of higher borrowing costs, and is now 14 percent off its peak, scaled on Oct. 16.

The yuan eased a touch to 7.4230 per dollar, as the central bank set a lower reference point for the day's trading, which traders said may be aimed at keeping the currency stable before raising rates.

China’s industrial output slows in October

2007-11-15T09:35:00.000+01:00

From the FT this morning, via Reuters.

China’s industrial output growth slowed a little in October under the weight of government policy curbs, but its tempo was still so high that economists said a further rise in interest rates was just a matter of time.

Factories churned out 17.9 per cent more goods than a year earlier, weaker than September’s 18.9 per cent pace of expansion and undershooting forecasts of an 18.3 per cent rise.

“We expect further moderation in industrial growth towards end of the year, given continued monetary tightening and sector-specific administrative measures aiming at putting a brake on investment spending,” Qian Wang, an economist at JPMorgan Chase in Hong Kong, said in a note to clients.

The government has taken particular aim at low-end industries that guzzle energy or pollute the environment by ending tax breaks and withholding planning permission. The real estate sector has also been in the crosshairs.

Thursday’s report provided further evidence, on top of slower export growth in recent months, that Beijing’s policies are starting to bite.

Output of non-metal minerals, ferrous metals, cast iron and steel was slower in October than in the first nine months, while growth in coal and cement production slowed abruptly to 4.0 per cent and 9.8 per cent, respectively, from a year earlier.

“As cement is used as a major building material, slower production could signal a slower property market ahead,” economists at BNP Paribas said in a report.

Still, the dip in growth was modest and from a breakneck pace. Output in the first 10 months of 2007 was up a prodigious 18.5 per cent from a year earlier, by far the fastest rate of growth in any major economy.

Chris Leung, an economist with DBS in Hong Kong, noted that October’s dip came after a super-sized gain in September. A week-long national holiday in early October had an impact, too.

“But even if I discount this factor, the trend is still very robust,” Mr Leung said.

The World Bank forecast on Thursday that China’s gross domestic product would grow 11.3 per cent this year and 10.8 per cent in 2008, which would mark the sixth straight year of double-digit expansion.

The sustained growth has fanned worries that the world’s fourth largest economy could boil over.

The State Council, China’s cabinet, said on Wednesday that inflationary pressure was quite strong, while Zhou Xiaochuan, central bank governor, has voiced concern that prices will keep ratcheting higher if people become accustomed to inflation.

After consumer price inflation rebounded in October to a nearly 11-year high of 6.5 per cent, economists expect Mr Zhou will try to contain inflationary expectations by raising interest rates before long for the sixth time this year.

Indeed, Yu Song and Hong Liang at Goldman Sachs told clients to be ready for two 0.27 percentage point increases before the end of the year.

They also expect the central bank to take further steps to withdraw cash from the banking system and to let the yuan rise faster – a key demand of US and European policy makers.

and Bloomberg:

China's industrial production grew 17.9 percent in October as automobile and electronics output accelerated, underscoring government concern that the world's fastest-growing major economy risks overheating.

The increase was less than September's 18.9 percent, according to figures released by the statistics bureau today, and compares with the 18.5 percent median estimate of 22 economists surveyed by Bloomberg News.

The slowdown may be insufficient to deter the central bank from raising a one-year lending rate that's already climbed 1.17 percentage points this year to a nine-year high of 7.29 percent. Premier Wen Jiabao yesterday pledged to tighten economic controls after inflation accelerated to the fastest in a decade and the trade surplus widened to a record.

``Beijing knows that we are on the verge of overheating and interest rates need to rise very soon,'' said Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai.

The key rate compares with 4.5 percent in the U.S., 5.75 percent in the U.K. and 0.5 percent in Japan.

China should raise interest rates and allow more currency appreciation, the World Bank said today. Bigger yuan gains would staunch money inflows by pushing up export prices. The currency has climbed 11 percent versus the dollar since a fixed exchange rate ended in July 2007.

Production growth was higher than the 14.7 percent gain a year earlier and the 16.6 percent expansion for all of 2006. Output rose 18.5 percent for the year through October.

Automobiles, Computers

Automobile output rose 24.3 percent in October from a year earlier. Computer, telecommunications and electronic equipment production climbed 18.9 percent.

SAIC Motor Corp., China's largest carmaker, plans a 12 percent increase in production this year to 1.5 million vehicles, Chairman Hu Maoyuan said Oct. 16.

China's economy, the world's fourth largest, expanded 11.5 percent in the third quarter from a year earlier. Inflation accelerated to 6.5 percent in October, matching August's rate. The monthly trade surplus was $27 billion.

Spending on factories and property probably climbed 26.2 percent in the first 10 months, according to a Bloomberg News survey of economists. That figure, the last in this round of data, is due at 10 a.m. tomorrow.

``Data released this week has shown increased risks of overheating and the central bank has little excuse not to raise interest rates,'' said Wang Tao, head of economics and strategy for Greater China at Bank of America Corp. in Beijing.

Pollution, Energy

China is trying to curb investment in industries that have overcapacity, consume too much energy and produce excessive pollution. The premier said last month that the government will limit land use, tighten investment-project approvals and guide bank lending.

``Policy tightening'' has cooled factory output, said Ben Simpfendorfer, a strategist at Royal Bank of Scotland Plc in Hong Kong. ``It will moderate further in the early part of next year as exports slow on weaker global demand.''

While the trade surplus reached a record on Christmas shipments, the 22.3 percent gain in exports from a year earlier was the smallest increase in seven months. Retail sales in the U.S. rose 0.2 percent in October from the previous month after gaining 0.7 percent in September, the Commerce Department said yesterday.

Export Demand

Weaker growth in demand for exports ``may be a factor behind the moderation in industrial production growth,'' said Liang Hong, senior economist at Goldman Sachs Group Inc in Hong Kong. Inflation leaves the government ``with little choice but to tighten monetary policy further,'' she said.

Besides rate increases, the People's Bank of China is boosting the proportion of deposits that lenders must set aside as reserves to 13.5 percent, the highest level since at least 1987, from Nov. 26. That's up from 9 percent at the start of the year.

China's banking regulator met with the five biggest state- owned banks on Nov. 13, asking them to slow lending, the official Shanghai Securities News reported.

In India, the world's second-fastest growing major economy, industrial production grew 6.4 percent in September.

China GDP Growth Maintains its pace.

2007-10-25T08:05:00.000+02:00

China’s economy maintained its rapid growth in the third quarter, expanding by 11.5 per cent, leaving it on track to grow by its fastest annual rate since the 13.1 per cent pace achieved in 1993.The third quarter represented a slightly slower pace than the second quarter, when output rose by 11.9 per cent.

The marginally slower pace was largely due to a series of government tightening measures, including successive interest rate rises, directives to state banks to cool lending and tighter enforcement of environmental rules.

Even with the slower pace in the third quarter, the central government’s tightening measures are expected to continue until at least the end of this year.

The National Bureau of Statistics, which released the growth figures on Thursday, confirmed a disclosure by a senior official last week that annual consumer inflation slowed to 6.2 per cent in September from 6.5 per cent in August. Inflation is still more than double the central bank's annual target of 3 percent and higher than the key one-year deposit rate of 3.87 percent, encouraging speculation in stocks and property.

The benchmark CSI 300 Index of stocks fell the most in six weeks on speculation that the central bank will raise interest rates for the sixth time this year, curbing company earnings. President Hu Jintao is trying to tame the flow of cash into the economy from record exports without triggering a sudden slowdown.

The yuan rose to as much as 7.4834 versus the dollar from 7.4926 yesterday, heading for the biggest weekly gain in five weeks. It has climbed more than 10 percent versus the U.S. currency since the end of a fixed exchange rate in July 2005 and fallen 7 percent against the euro.

China's trade surplus surged 69 percent in the first nine months from a year earlier to $185.7 billion, topping the record total for all of 2006 and fueling investment. Factory and property spending in urban areas climbed 26.4 percent, the statistics bureau said today. That's up from the 24.5 percent pace for all of 2006.

Investment accounted for 42 percent of GDP growth in the first nine months, versus the 37 percent share for domestic consumption, the statistics bureau said, while ``External demand'' accounted for 21 percent.

Industrial production increased 18.9 percent in September from a year earlier, the fastest pace in three months and up from 17.5 percent in August. Retail sales climbed 17 percent after gaining 17.1 percent.

A spokesman for the National Bureau of Statistics said at a press conference announcing the latest growth figures that the “institutional, systemic and structural problems existing in economic performance are still pronounced.”

“These problems include rapid economic growth, price rises, high pressure on energy consumption and pollutant emission reduction, and the uncertainty of world economic growth.”

According to the office,China has taken six years to achieve 40 percent of a 20-year target of quadrupling per-capita GDP by 2020, with an increase to 16,084 yuan this year.

Ali Baba IPO

2007-10-23T09:00:00.000+02:00

Chinese e-commerce portal Alibaba.com could raise up to $1.5 billion (€1 billion) in its Hong Kong listing next month, the company said Monday, describing it as the biggest Internet IPO since Google.

Alibaba Group, the company that controls the business-to-business commerce Web site, said it plans to sell 858.9 million shares at an indicative price range of 12 to 13.50 Hong Kong dollars each, up from an earlier initial price of HK$10-HK$12.

Alibaba's charismatic founder Jack Ma, a former English teacher who set up the company in 1999, told reporters the profits would help build a "world-class infrastructure and ecosystem for e-commerce, which will contribute to the sustained growth of the Chinese economy."

Ma was speaking by video phone from the United States where he is drumming up support for the IPO.

Alibaba -- which allows companies in both China and overseas to trade with one another online -- is one of China's fastest growing Internet companies.

It has seen its registered members soar from 6 million in 2004 to 24.6 million in 2007. Paying members increased from 77,000 in 2004 to 255,000 by June 2007.

The company recorded a net profit of 295.2 million Chinese yuan ($39.2 million; € 27.5 million) in the six months ended June 2007.

It expects its net profit to more than triple to 622 million yuan ($83 million; €58 million) from 219.9 million yuan, on strong growth in revenue from both its international and Chinese Web sites.

Unlike other offerings in which most of the shares on offer are newly issued shares, nearly three-quarters of the shares in the IPO are existing shares held by Alibaba.com's parent, Alibaba Group.

About 85 percent of the shares are marked for institutional investors with the rest open to retail investors.

Already, the shares are in high demand, with the South China Morning Post newspaper reporting the institutional tranche was already 50 percent subscribed before the price was raised Yahoo! Inc., which holds a 39 percent stake in Alibaba.com's parent, Alibaba Group, had already agreed to subscribe to about $100 million worth of shares.

Alibaba said another seven "strategic" investors had agreed to take a stake, representing in total about HK$2.3 billion ($296 million; € 207 million)or 20 percent of the offering.

They include Cisco Systems International B.V., AIG Global Investment Corporation (Asia) Ltd., FoxConn (Far East) Ltd. and Industrial and Commercial Bank of China Ltd., as well as investment companies held by Wharf Holdings Ltd. Chairman Peter Woo, Malaysian tycoon Robert Kuok and the Kwok family of Sun Hung Kai Properties Ltd., the company said.

Strong demand from the public -- which can start buying the shares from Tuesday -- is also expected to trigger an extra allocation of 113.67 million shares to raise a total of $1.7 billion (€ 1.19 billion).

Net proceeds from the listing were expected to be about HK$2 billion ($335 million; € 234.46 million), the company said, which would be spent on strategic acquisitions and development initiatives to grow the company's business both in China and overseas.

Shares of the company, which claims to be the largest business-to-business e-trading site in China, will begin trading on Nov. 6

Chinese Manufacturing Continues To Accelerate

2007-10-02T08:50:00.000+02:00

China's manufacturing activity expanded at a faster pace in September, according to a survey by CLSA Asia Pacific Markets.The Purchasing Managers' Index rose to a three-month high of 55 from 53.4 in August, CLSA said today in an e-mailed statement. A reading above 50 indicates an expansion.

Rapid manufacturing growth is becoming even more rapid it seems. Monetary policy is still extremely loose and China's economy is still accelerating.

The CLSA index is based on replies to questionnaires sent to purchasing executives at more than 400 industrial companies. The survey tracks changes in output, new orders, employment, prices, inventories and delivery times. The data is seasonally adjusted.

The output index rose to 58.3 in September from 54.6 in August, while the index of new orders climbed to 59.3 from 54.6. The index of export orders increased to 52.9 from 52.3.

A government PMI survey, released by the China Federation of Logistics and Purchasing and the National Bureau of Statistics yesterday, also showed a higher reading. The index climbed to 56.1 in September from 54 in August.