Nuances and questions abound in discussion of China’s economy and where it is headed. Is it due for a fall? Will exports decline? What about currency reevaluation? What about inflation?
Here, I collect and comment on some recent numbers and articles dealing with China’s economic situation:
“China’s budget surplus for 2008, to July 31, was more than $200 billion, up by 33 per cent year on year in the first half” (Callick, The Australian).
Consumer Spending / Domestic Consumption
“Retail sales, the main measure of Chinese consumer spending, grew by 23.2% year on year in August, slightly less than July’s 23.3% but substantially better than last August’s 17.1%” (Pettis).
Retail sales rose to $128.1 billion in August (Oliver). Interestingly, the Olympics did not appear to provide much of a “bump” in August retail sales.
This leads me to conclude that although industrial construction might rise post-Olympics, consumer spending will likely actually decrease for September as “belts tighten” and reasons for splurging diminish. Although more employees will be “back on the job,” they will not necessarily have extra discretionary income to spend. By October or November, the “Olympic bump” of disruption should cease affecting China’s consumer spending numbers, and it is wholly possible that they will trend downward.
In its Asian Development Outlook 2008 Update, the Asian Development Bank “anticipated China’s gross domestic product (GDP) would grow 10 percent this year, consistent with its April forecast. However, it lowered China’s 2009 predicted growth rate from 9.8 to 9.5 percent… In the first half of this year, the nation’s GDP expanded 10.4 percent, 1.8 percentage points slower than the same period last year” (China Daily).
“Official loan growth, if adjusted to strip out the effects of inflation, expanded a modest 4% in August, according to Standard Chartered estimates” (Oliver).
“Effective Tuesday [September 16], the People’s Bank of China lowered by 0.27 percent, to 7.2 percent, the regulated benchmark rate that commercial banks may charge for one-year loans to business borrowers with strong credit histories… The central bank also lowered by a full percentage point the share of assets that small and medium-size banks must deposit as reserves with the central bank, effective Sept. 25. The so-called reserve requirement ratio is an important tool in China for limiting how much money can be lent by commercial banks” (New York Times).
“Export growth also slowed, to 21.1% year on year in August from 26.9% in July. That left the trade surplus for August at a record $28.7 billion – a number which will help ensure that China’s money supply will continue expanding sharply in August” (Pettis).
“If the “Chinese content” of China’s goods export sector is around 50% (Vox), goods exports account for between 17 and 18% of China’s GDP. Exports of goods and services account for about 12% of US GDP” (Setser.)
Setser’s numbers imply China is susceptible to a global downturn and decline in its export sector. To offset a decline in national growth, domestic spending will need to rise significantly if export demand suddenly drops off. Between rising oil prices, costs of doing business in China, and a developing worldwide economic malaise, it appears China will see some significant declines in export growth from September through October.
FDI Into China
“Foreign direct investment into China rose 41.6 percent in the first eight months of the year compared with the same period last year, Beijing said.
“Overseas companies invested 67.7 billion dollars in the period from January to August, the commerce ministry said in a brief statement on its website” (AFP).
This is an intriguing trend, when contrasted against a couple of alarmist mainstream media articles discussing business flight from China to elsewhere. (At the time of those discussions, China Law Blog, myself, and Business Week among others, notably demurred.)
“Imports grew last month at a 23.1% in August, down sharply from 33.7% in July” (Pettis).
Post-Olympics, Import growth is likely to resume as demand for internationally-acquired resources used in construction will increase.
“Industrial output grew by 12.8% year on year in August, versus 14.7% in July, and 17.5% last August. There was weakness in almost every sector, with iron and automobile production actually contracting versus one year ago” (Pettis).
“China’s industrial production expanded at its weakest pace in six years in August, reflecting factory shutdowns for the Olympics and cooling overseas demand for consumer goods … Merrill Lynch estimates the factory shutdowns, combined weaker demand for steel, cement other materials resulting from the construction freeze, knocked 2.5 percentage points off headline growth. [They] expect a post-Olympic rebound in industrial production growth [based] on both pent-up demand and the post-quake reconstruction.” (Oliver, MarketWatch).
“CPI inflation for August, was surprisingly good, coming in at 4.9% year on year, which is well below July’s 6.3% and also well below market expectations of around 5.5%. The decline in CPI inflation was driven mostly by declining prices in pork and vegetable oil… All the decline in CPI occurred in the food sector – non food inflation was steady at 2.1%.” (Pettis).
“The [Asian Development Bank] bank also lifts its inflation projection for next year to 5.5 percent from [an April estimate of] 5 percent… citing possible price hikes of fuel and electricity, which may lead to higher production costs being passed onto consumers” (China Daily).
“Commenting on the moves, Zhuang Jian, senior economist at the ADB, said the rate cuts indicate the government’s tightening monetary policy is beginning to relax. He also expected more loosening policies to come either later this year or in 2009 in order to ensure the sustainable growth of the economy” (China Daily).
RMB Reevaluation and China’s Foreign Investments
“From June 2007 to June 2008, the foreign assets of China’s central bank increased by $681b” (Setser).
“If China’s total foreign holdings rise to $3 trillion by the end of 2009—an increase that is consistent with China’s current pace of foreign asset accumulation—a 33 percent RMB appreciation against the dollar and euro would produce a $1 trillion financial loss” (Setser, 30).
Value-Added To Exports & Results for Currency Reevaluation
According to a new way of evaluating value-added to products; “the share of foreign value added in Chinese manufactured exports is at about 50%… which is much lower than most other countries. This implies that a given exchange rate appreciation is likely to have a smaller effect on China’s trade surplus than for other countries. The domestic content share is particularly low in sectors that are likely to be labelled as sophisticated, such as electronic devices and telecommunication equipments. This means the competitive pressure China’s exports place on skilled workers in high-income countries is smaller than suggested by a simple-minded look at the raw trade data.” (Vox) (These assertions are well worth a detailed examination at a later time.)
Are Asian Central Banks Still Behind the Inflation Curve?
Arpitha Bykere and Mikka Pineda, Asia EconoMonitor
An Overview of Asian Monetary Policy, with tables, charts, and analysis.
CPI inflation was unexpectedly low, the trade surplus unexpectedly high
Michael Pettis, China Financial Marekts
Something is odd regarding China’s recent inflation numbers, Professor Michael Pettis (of Beida) argues.
How much of Chinese exports is really made in China?
Robert B. Koopman, Zhi Wang, Shang-Jin Wei
A new formula calculates the value-added content of China’s export-manufacturing. It finds the domestic value-added content to be 50%.
Fire and Ice
Michael Pettis, China Financial Markets
China’s falling stock market, declining increases in industrial production, and future economic challenges.
As Economy Slows, China Eases Monetary Policy
Keith Bradsher, The New York Times
An overview of China’s latest monetary policy developments.