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Saturday, April 17, 2010

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

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.

Friday, September 11, 2009

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

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.

Saturday, June 20, 2009

Facebook Links

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.

Thursday, June 11, 2009

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

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.

Wednesday, June 10, 2009

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

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.

Monday, May 11, 2009

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

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.

Wednesday, April 01, 2009

Manufacturing Industry Contracts Again In March (Update 2)

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.