China Inflation and GDP Growth March 2008

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

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

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

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

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.