China: Not Everything is Rising

August 18, 2008

It is remarkable that the fourth largest economy in the world would still be recording real economic growth of marginally more than 10%.  When an economy joins the upper tier in world rankings, potential economic growth generally declines, and the global environment was poor in 2Q08.  Nonetheless, among monthly data released last week, retail sales advanced 23.2% in the year to July, the most since 1999 and up from 21.4% in 1H08 and 16.8% in 2007.  Exports increased 26.9% year-over-year in July, about 5 percentage points faster than anticipated and up from 17.6% in June, and that resulted in the largest monthly trade surplus ($25.3 billion) so far this year.  By comparison, the surplus has averaged $20.8 billion over the last 12 months.  Foreign direct investment in China leaped 65.3% in July from July 2007, dwarfing a 13.6% increase in calendar 2007, and fixed asset investment grew 29.5% y/y in July, above the first-half pace of 26.8%.  Producer price inflation picked up to 10.0% y/y in July, most since 1995 and up from 2.4% in July 2007, reflecting costlier energy.

On the other hand, industrial production growth slowed to 14.7% in July from 16.3% y/y in 1H08 and 18.5% in 2007, and the on-year increases in M2 of 16.4% and yuan lending of 14.6% were lower than seen six months earlier in January (respectively at 18.9% and 16.7%).  Consumer price inflation also receded to 6.3% from 7.1% in June and a 2008 peak of 8.7% in February, and such was almost as low as the print of 5.6% in July 2007.  The CPI is dominated by food, which slowed to a pace of 14.4% from 17.3% in June, while non-food items accelerated to 2.1% from 1.9% in June and 0.9% in July 2007.  Chinese officials maintain that PPI pressures will not seep into the CPI.  If the CPI is indeed destined to remain above the peak last February, it will be necessary for oil prices not to spike sharply upward again.

Chinese equities and the yuan’s value against the dollar also are not rising anymore.  The CSI 300 index has plunged 62.3% since peaking in October 2007, making China the worst performing major stock market.  Meanwhile, the exchange rate slid 1.6% at an annualized rate during the first half of this year’s third calendar quarter, a radical shift in behavior from its 13.6% annualized pace of appreciation against the dollar in the first six months of this year.  Stock prices and the currency are highly influenced by government policy.



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