China’s GDP grew by a too-high 11.5% in the third quarter of 2007.Commentators trying to put a good face on this number were eager to point out that at least it didn’t grow by 11.9%, which was the rate for the second quarter.Li Xiaochao, the statistics bureau spokesman, tried to offer us comfort by assuring us that “The surging economy has stabilized, while rising prices have been brought under control through a combination of monetary, fiscal policies and administrative measures.”
I am not so sure – 11.5% is a very high number, and the fact that China’s GDP grew at an even higher pace three months ago is scant comfort. In fact among the numbers released yesterday is one that undermines, in my opinion, any positive spin on slowing GDP growth.
To explain why let me go back to an earlier entry.In a September 12 entry I wrote the following, concerning the decline in industrial production growth:
Industrial output grew at a slower pace in August, to 17.5%, from 18.0% in July. The government had taken a series of market and administrative measures to slow growth down, of which I believe the most important has been, as it always has, instructions to banks to tighten credit to certain sectors of the economy.
This has happened many times before. When growth numbers get out of hand the authorities put pressure on the banks to reduce loan growth, and for a couple of months loan growth slows, followed by slower growth in industrial production…
…My guess is that we will see a continued moderation of the pace of growth for a few more months but, unless the world economy contracts, before the end of the year growth in industrial production will accelerate again. FDI for the first eight months of the year, by the way, was $41.95 billion, mostly into the manufacturing sector. This figure is 12.8% greater than the amount over the same period last year. That doesn't suggest to me that lending to the industrial sector declined willingly.
I was partly wrong – there was no continued moderation in the growth rate of industrial production.In fact for September it grew by an alarming 18.9%, much higher than August’s 17.5%.Basically, as I expected, it didn’t take long for the slowdown to peter out, and even though at its lowest the growth in industrial production was too high, it very quickly turned even higher.
For me this is a very important number because it is at the heart of the self-reinforcing cycle: the high trade surplus leads to high monetary growth and investment, which leads to a further increase in production relative to consumption, the balance of which must be exported, so creating an even higher trade surplus.If industrial production rises, expect the trade surplus to rise too.China must export what it produces but doesn’t consume.
Should we anticipate anything to get in the way of the current trend as long as: 1) this under-consumption is politically workable (I'm in no position to make an educated guess on such an issue), 2) the cash-flow of these great chinese exporters is positive or, at least, as long as the banks do follow on growth.
Of course on the one hand we have the feeling of an investment bubble in a late stage. But on the other one, when will the system start signalling over-investment? Will it in any way except price inflation?
Of course, can we assume that - since cash can and will never be anything but plentiful under current monetary conditions - it's gonna be very late into the business cycle?
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (4) for "Don’t take comfort in reduce...
- 11/4/2007 3:13 PM
October, 2007