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Thursday, January 24, 2008

China Q4 2007 GDP Growth and Inflation

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.

Friday, January 11, 2008

China's December Trade Surplus Slows

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.