Chinese Growth Still High

July 21, 2008

Although on-year real GDP growth slowed from 11.9% in 2Q07 to 11.7% in 4Q07 and 10.1% in 2Q08, underlying growth in the first half of 2008 surpassed 10.0% and was about a percentage point stronger than in the fourth quarter of 2007.  The main loss of steam has been in export growth, which weakened to 17.6% y/y in June from 22.5% in 2Q08 and 27% in June 2007.  Money expansion in June of 14.2% in M1 and 17.4% in M2 also trended lower, but yuan lending of 28.6% is still sizzling.  Retail sales of 23.0% y/y in June was significantly above the 16% advance in the previous 12 months. Fixed asset investment increased 29.3%, up from 26.7% in the year to June 2007, and industrial production, although lower, posted an enviable 16.3% increase in the year since June 2007.  Chinese reserves climbed another $126.6 billion in 2Q08, a rise of 18.4%, to $1.809 billion, which represents 42% of all reserves held by countries in Asia.  China’s record of sustained growth around 10% is extraordinary and will catapult it past Germany into third place behind the United States and Japan in size later this year.  Slowdowns in China continue to be minuscule setbacks considering average economic growth for the past two decades.

Monetary officials in Beijing appear nonetheless less vigilant in their determination to cool growth in pursuit of inflation containment.  The CPI slowed from 8.5% y/y in April to 7.1% in June, which is still well above inflation of 4.4% in June 2007 and 1.5% in 2006.  Moreover, producer price inflation is still cresting, advancing by 8.8% y/y in June versus 8.1% in April and 2.5% in June 2007.  Both business sentiment and consumer confidence fell somewhat in 2Q08, and conditions have become more fragile in many developed economies.  Analysts are no longer anticipating a Chinese interest rate increase later in 2008, and speculation has grown that the pace of yuan appreciation will slow.  Against the dollar, the yuan advanced at an annualized rate of 13.8% between end-2007 and just before America’s Memorial Day weekend but by 10.5% annualized since May 23rd.

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