China To Raise Inflation, Lower Money Supply Growth Targets For 2011

The recently concluded annual economic policy meeting set a growth goal of 8% for 2011 with the inflation target raised to 4% from 2010’s 3% and new bank lending to be held at 7.5 trillion yuan ($1.1 billion), according to local press reports quoting authoritative sources. The broad money supply (M2) is set for 16% growth, a slowing from the 19.5% rate it is running at this year, as monetary policy continues to be gently tightened to tackle inflation. All in all, a modest application of the liquidity sponge, and one which suggests a growth rate target of 8% looks unrealistically low.

Other headline goals for 2011 include creating more than 9 million new urban jobs, keeping the official unemployment rate below 4% and extending the incentives for new appliance sales in the countryside emphasizing the tilt towards social goals, income equality and more domestic consumption that are priorities in the new five-year plan that starts next year.

 

We Are Shocked, Shocked To Find Dodgy Data Here

More from the latest bunch of leaked U.S. diplomatic cables published by WikiLeaks telling us what we already knew but which get piquancy from the detail. In this case, it is a suggestion that provincial GDP data is inflated. Well, hold the phone. The spice comes from the comment being made by Li Keqiang, who at the time, 2007, was Party secretary in Liaoning. He is now a vice-premier in line to succeed Wen Jiabao as prime minister and thus become the man in charge of economic policy.

Like the fictional town of Lake Woebegon created by the American satirist Garrison Keillor where all the children are above average, it has long been a curious fact that no province has let its reported GDP fall below the national average. Local officials’ promotions depend on measures of local economic development. It is no surprise that they add up the numbers in a way that reflects the best possible light on themselves. Nor is that a uniquely Chinese trait.

China’s national GDP figures are more solid, though no economist would pretend they are perfect in either their accuracy or consistency despite efforts to improve them in recent years, many led by Li as it happens. You just can’t manage an economy the size of China’s without accurate data. Nor can China play the bigger role it seeks in multilateral organizations to which it has to report standardized data.

Li, who made his reported comments to the U.S. ambassador at a dinner in Beijing, was talking specifically about his own province but said he got a better sense of its pace of economic growth from monitoring economic activity that could be metered free of a political filter, such as electricity consumption, rail freight volumes and loan disbursements.

 

Latest GDP, Inflation Numbers Signal Economy Back To Normal

The latest GDP and consumer price inflation figures confirm the economy is slowing more slowly than expected, which led to the surprise rise in interest rates earlier this week. The economy grew at 9.6% in the third quarter compared to the same period a year earlier. That is the slowest year-on-year quarterly growth of the year as the government continues to mop up after its stimulus package, but still faster than expected. Consumer prices rose by 3.6% in September compared to the same month a year earlier, the fastest increase in two years and well above the government’s 3% target rate. More expensive food, in the wake of the year’s abnormally bad weather, and housing were the reason.

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At an IMF conference on Monday, central bank governor Zhou Xiaochuan (right) said China faces increasing risks from excessive liquidity, inflation, asset bubbles and non-performing loans in the wake of the global financial crisis. While those may all be true, the latest economic data and the firmness of domestic demand and investment suggest the economy has weathered the crisis and is now getting back to normal. While more interest-rate rises and increases in banks’ reserve-ratio requirements are likely, they will be mainly intended to deflate the persistent property bubble.

China As No 2: Don’t Hold The Phone

There is something more symbolic than substantial in China’s elevation to the world’s second largest economy, if it has actually happened as the new Japanese second-quarter gross domestic product figures are being taken to imply. There are so many statistical variables in comparing countries’ nominal GDP from the assumptions made in seasonal adjustment to exchange-rate fluctuations that the exercise quickly become pretty meaningless. Indeed, China, unlike Japan, doesn’t even produce seasonally adjusted figures, while for its part, Tokyo decided earlier this year to revise how it calculates its GDP, in part because its growth had looked so sluggish for so long, it wanted to spruce up the numbers.

China may already have overtaken Japan in nominal GDP terms some time back; some economists argue that China’s statistics are so rudimentary they undercount the economy’s size by as much as 20%. And in purchasing power terms, a more meaningful basis of comparison than nominal GDP, China has been the second largest economy for a decade. But then look at GDP per capita, and China lags Japan (and the U.S. and the E.U.) by a long way.

All that can be said with any certainty is that China’s economy has been growing rapidly while Japan’s has been becalmed, and that that has led to a shift in regional and global economic power in China’s favour. But then we all sort of know that.

China’s Economy Slowing Nicely

Moves to cool the real estate market and unwind the effect of last year’s stimulus-driven bank lending binge appear to be working on the evidence of the slowing of the economy. China’s GDP grew by 10.3% in the second quarter year-on-year,  down from 11.9% in the first. Over the first six months, the economy expanded by 11.1% compared to the same period a year earlier, the National Bureau of Statistics says.

Beijing’s practice of publishing year-on-year GDP comparisons, and not quarter-to-quarter ones, makes judging the current trajectory of the slowdown more difficult. The unexpectedly sharp slowdown in industrial production, up 13.7% in June, compared to May’s 16.5% rise, allied to the slowing of import growth in the most recent monthly trade figures and some evidence of a fall in consumer confidence, suggest that the economy may well be growing now at somewhere in the 8-10% (annualized) band. That is where the authorities want it.

For as long as it stays in that range there is unlikely to be any policy change, either tightening or easing. There is still a lot of off-balance sheet and informal-sector bank credit to mop up. Outstanding loans at all financial institutions totaled 44.6 trillion yuan ($6.6 trillion) at the end of June, only 2.6 trillion yuan down from a year earlier. The question is how long the wiggle room in that GDP growth band for the authorities to continue mopping will last. The answer may lay as much in what happens to growth (or otherwise) in Europe and the U.S. as it does within China itself.

China’s Q3 Economic Outook

The eurozone debt crisis has changed the short-term plans of China’s economic policymakers. The second half of this year was meant to be when the stimulus measures put in place for the global financial crisis were unwound  and the assets bubble they produced deflated in measured manner so growth could continue at a brisk but not dangerously rapid pace. Instead they are having to deal with the consequences of the fiscal austerity measures being put in place by indebted European governments.

Those will affect China directly as Europe is the main export market for its manufacturers and indirectly though the brake they will impose on global economic recovery and an increased risk of a double-dip recession. For now, China’s leaders are signaling that they will do what is necessary to sustain growth. That will mean no rush to wind down existing stimulus measures and a readiness to provide more should a slowdown in the growth rate warrant it.

Absent spectacularly negative events in Europe, we don’t think that will be needed. We still expect the economy to grow by 10% in the third quarter, thanks to strong domestic demand, recovery in the U.S. and the revival of world trade. That would be down from the 11.9% growth rate of the first quarter, but still comfortably above the 8% level that sends political alarm bells ringing in Beijing and opens the public spending coffers.

The uncertainty that pervades policy makers will likely mean a pause in their slow but steady tightening of monetary policy already underway. Fixed asset growth is slowing, showing that some of the measures the authorities have been taking to deflate the property bubble are having an effect (the euro crisis has taken care of the bubble in stock prices). The central bank has raised banks’ capital reserve requirements three times this year to rein in the lending that is fueling the property boom. However, new bank lending is proving more intractable than the central bank would like: 3.4 trillion yuan ($498 billion) of new loans were made in the first four months of the year, on track for a number for the full year closer to last year’s 9.6 trillion yuan than this year’s target of a reduction to 7.5 trillion yuan.

Similarly consumer price inflation is bumping up against its targets (3% for the year). Beyond soaring housing prices, food prices are up following a long run of wretched weather in key crop growing areas. Commodity prices are rising worldwide and labor cost pressures are increasing beyond the well publicized wage rises at Foxconn and Honda. Both those trends showed up in the 6.8% increase in the producer price index in April. Key questions are how much of those price pressures can manufacturers pass onto domestic and export customers, and with what effect on sales. None the less, inflation pressures aren’t so great that the central bank needs to raise interest rates again. Given the overall uncertainty over the economic outlook, it has no great desire to do so anyway.

Keeping the economy steady and growing until it is clear what the fallout from the euro crisis is remains the priority. A wild card for the economy is the leadership succession. We are seeing evidence of the behind the scenes factional jostling for position breaking through in foreign policy every now and then. No reason to suppose that couldn’t happen with economic policy, too, especially as the two are now so connected. Arguably with the yuan revaluation issue, it already has.

Fast Q1 GDP Growth Adds To Pressure On Beijing To Cool Economy

Eleven point nine percent GDP growth in the first quarter is more good news than China’s leadership can use. Though the same quarter a year ago was pretty crummy, amplifying the growth rate, the new number puts pressure on Beijing to let the yuan revalue upwards against the U.S. dollar and to raise interest rates. The latter won’t worry it much. It needs that (and more reining in of new bank lending) to cool off the bubbles in assets such as real estate and stocks as it starts to reel in the stimulus package put in place to see China through the Great Recession. The former, however, is a different matter, and not just because of the strain the issue is putting on political relations with Washington. Beijing increasingly also needs to lower China’s import costs to help curb the risk of inflation. A loosening or scrapping of the peg to the dollar gets more pressing, though Beijing, as President Hu repeated this week for the umpteenth time, will do that at a time of its own choosing.

China’s Planners Deliver 8% Growth With Some To Spare

The 2009 GDP figures are a triumph for central planning, or at least central spending. At the start of the year, Beijing adjudged 8% growth for the year as necessary for social stability. It delivered 8.7% thanks to the massive stimulus program that flooded into jobs-creating infrastructure investment via state bank lending. Fourth quarter growth was 10.7% — double digit growth like we were back to before the global financial crisis hit.

Now has to come the hard work of mopping up the excess liquidity to prevent inflation taking hold and the swelling bubbles in the property and stock markets from going pop. Consumer prices rose 1.9% in December over a year earlier after falling for much of the year, which will have rung some political as well as economic alarm bells. State-owned banks have been told to rein in new lending, their reserve requirements have been raised and an interest rate rise seems a sure bet. And as we have noted before, there is still the need to turn stimulated demand into the self-sustaining variety.

As for which is the world’s second largest economy after the U.S., this Bystander thinks it is still too close to call between China and Japan. Even stripping out the exchange rate factors, the margin of error, to put it politely, in the calculation of China’s GDP is too broad to provide a definitive answer while the headline numbers (and Japan’s is still an estimate) are still this close. No doubting that it is also a question of when not if, though.

Eight Percent Growth And Damn The Torpedoes

Beijing has set itself a target of 8% GDP growth for the year and by hook or by crook it will get there.

First quarter growth, announced earlier this week, came in at 6.1%, its slowest pace since quarterly GDP numbers were first made public in 1992, down from 10.6% in the same quarter a year earlier and the 6.8% rate in the fourth quarter. But with much of the rest of the world, read the country’s export markets, in recession, as Prime Minister Wen Jiabao said today at an annual gathering of government and business leaders on Hainan, the economy is better than expected.

That is is not worse is down to the 4 trillion yuan stimulus package announced last November and Beijing’s ability to burst through the credit crisis that has paralyzed lending elsewhere by getting its banks to make loans. Bank lending has soared since the fourth quarter, pouring money into state-backed infrastructure projects. Fixed asset investment, which accounted for more than 40% of GDP in 2008, was up 28.8% in the first quarter (vs, 24.6% in the same period a year earlier).

There seems to be plenty of liquidity in the banking system and the risk of bad loans containable. Consumer spending is holding. Industrial production was reported to be up 5.1% in the first quarter–though industrial use of electricity, usually a good proxy for industrial production–fell 8.4% in the quarter according to the China Electricity Council. Assuming both numbers are right, that could point to private investment remaining stalled, though, which would mirror personal consumption. But, all in all, there is enough there to believe that the slowing of growth bottomed in the first quarter. The unknown, given the doubts over domestic private sector demand, is whether recovery is sustainable without growth restarting in the U.S. and European export markets, or whether it will require a second heft dose of government stimulus money to hit that 8% that will be hit.

China’s Growth Slows To 6.8% In Fourth Quarter

Not much to say about the latest GDP figures, released today, which were in line with expectations. China’s economy grew by 9% last year, but the annual figure masks a rapid slowdown in the fourth quarter to 6.8%. It is also the slowest growth rate since 2001 and the first time growth has fallen into single digits since 2003.

So much for the numbers, but what of the future?  Xinhua quotes government economist Wang Xiaoguang saying that  the 6.8% fourth quarter growth rate was not a sign of a “hard landing,” just a necessary “adjustment” from previous rapid expansion: “This round of downward adjustment won’t bottom out in just a year or several quarters but might last two or three years, which is a normal situation.”

So expect more stimulus spending, easing of bank loan requirements and interest rate cuts. The was a sharp rise in renminbi bank lending in December (up 18.8 year-on-year, following a 17% rise in November; though the anti-inflation clampdown on bank lending a year back distorts the comparisons), which stirs some hopes that stimulus efforts are beginning to have an effect as the big state-run banks lend for infrastructure development.