Coping With China

May 16, 2008

The U.S. rivalry with China is still in its early days. Once senses that this relationship will one day far usurp the present obsession of foreign policy with the Middle East and Russia. Like the U.S., China is a huge energy importer, but China’s U.S. asset holdings are tops. Chinese international reserves soared by $616 billion over the last five calendar quarters to $1.68 trillion. Real GDP expanded 11.9% last year, most in a dozen years. Inflation is accelerating, in part according to the U.S. Treasury as a result of Beijing’s mercantilist foreign exchange policy that keeps the renminbi severely undervalued. Producer prices rose 8.05% y/y in March-April, up from 6.35% in Jan-Feb and 4.4% in 4Q07. Consumer price gains accelerated to 8.4% in March-April from 7.9% in Jan-Feb and 6.6% in 4Q07, and non-food CPI inflation doubled between early-3Q07 and the most recently reported months. China’s current account surplus widened to 11% of GDP last year from 9.5% in 2006. Retail sales rose 22.0% y/y in April, above the 20.6% on-year advance in 1Q08. Fixed asset investment so far this year is 25.7% higher than a year earlier, maintaining the sizzling 25.8% climb in 2007. Corporate goods prices rose to 10.3% y/y in April from 9.3% in 1Q08 and 6.3% in 3Q07. M2 grew 16.9% in the year to April, more than had been expected. Growth in industrial output did slow but, with a 15.7% advance in the year to April, remains brisk. In a report released yesterday, the U.S. Treasury leaves no doubt that it considers China to be its biggest economic adversary. After noting that private consumption accounted for just 37% of Chinese growth in 2007 — just half as much the ratio in many countries — Treasury officials lament that “limited progress has been made toward the authorities’ goal of rebalancing growth away from exports and investment and towards consumption.” Beijing’s exchange rate policy is also blamed for constraining the flexibility of currency management in much of emerging Asia.



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