Retail sales in China for January and February shot up by 20.2% over the same period last year, above most forecasts.I think along with December’s equally rapid growth rate this is the highest growth rate yet recorded (although they have only been recording this for about ten years or so).I understand that these are nominal numbers, so part of the increase in spending simply reflects the fact that everything costs more, thanks to a year of 8-9% inflation.Still, even adjusting for inflation consumer spending is moving along healthily.
There is both good news and bad news here.The good news is that with domestic consumption growing so quickly, China is gradually rebalancing its economy away from its over-reliance on domestic investment and the export sector.This has to be healthy.The bad news is that a lot of this consumption growth may have been fueled by concerns over rising prices. If that is the case, we may already be caught up in the self-reinforcing loop I mentioned in yesterday’s blog entry, in which inflation concerns cause an acceleration of spending, which itself pushes up inflation.
Meanwhile we also got FDI figures for February, and they show a very sharp increase over February of last year. At $6.9 billion February’s FDI investments are up 38% over last February.Combined with the sizzling FDI numbers for January – $11.2 billion, or more than double the amount for January 2007 – this means that in the first two months of the year China has attracted $18.1 billion, or 75% more than the same period last year. Does this sharp increase – coming when the RMB is less cheap and tax benefits less copious – have anything to do with speculative desires to take advantage of the rising RMB? Perhaps.According to today’s Bloomberg, “The central bank is paying close attention to ‘excessive’ growth in foreign direct investment, the China Securities Journal reported this month, citing Hu Xiaolian, director of the State Administration of Foreign Exchange.”
At any rate there is a lot of speculation in the market about a further speeding up of the appreciation, which has been moving along at a rapid clip in recent days. Some people are even wondering out loud about a surprise move. Thomas Stolper, a London-based economist at Goldman Sachs said in a report March 10 that we might see a pick up in the rate of appreciation. According to him “One increasingly likely explanation could be that China's policymakers may be in the process of preparing the next leg of much faster appreciation, and maybe even another one-off revaluation.”
Money supply growth has slowed down a tad, although it is still too high, in my opinion. The PBoC said today on its website that M2 was up 17.5% from February 2007 to February 2008. Last month it grew by 18.9% and Bloomberg says the median estimate of surveyed economists was 17.8%. Loans were also up in February, by a relatively low 15.7% compared to the huge jump in January. We are getting so much volatility in the data that it is hard to get any clear sense of trends.
Could manufacturers just be selling stuff at rock bottom prices that Americans refused to buy because they thought it was (1) unsafe or (2) couldn't afford because of the slowing economy?
I suppose that inflation were harming Chinese people we might see the savings rate go down and maybe the stock market, which many people see as a bank.
By orgulous - 3/11/2008 9:30 PM
I think this is a huge force that has started. The supply of labour is reaching a bottle-neck and wages will start the run to world market levels.
Profits down, wages up. Investment down, consumption up. For many years.
By Stefan, Tallinn - 3/12/2008 12:37 AM
Hallo
"There is both good news .... The good news is that with domestic consumption growing so quickly, -China is gradually rebalancing its economy away from its over-reliance on domestic investment and the export sector."
I would ad: a growing number of Chinese people seems to participate in consum. (ret. growth 20.2% - inflation 10% - increase of consum of the "old" consumer 4% - new consumer 6%)
off topic: new DB-list of CN econ. key indicators: http://www.dbresearch.de/servlet/reweb2.ReWEB?rwkey=u1562160
-new CPI outlook for 2008: eop 6.1% (up from 3.4% from 2.feb.08) aop 7.4% (uo from 4.8%)
My comment: I still believe, that the impacts of US-recession is underestimated; the inflation will disappear.
globumedes
By globumedes - 3/12/2008 1:12 AM
michael,
although you are correct to point out the "volatility" in the data, many underlying trends are nontheless unmistakable. china's trade surplus collapse is a macro-driven shift that began, not coincidentally, when the u.s. credit crunch started to intensify.... it is abundantly clear that the slowing of exports to the u.s. will continue to accelerate [since posting a + 56% yr-yr expansion in the trade surplus during september, the subsequent ongoing plunge in exports to the u.s. has caused the yr-yr comparison to fall to an outright contraction, deflating during february at a (-) 63% yr-yr pace]..... while the spike in the value of commodity imports continue to surge with no end in sight.
moreover, the collapse in exports to the u.s. is not an isolated phenomenon.....exports to every single one of china's major trading partners, especially within asia, as well as the EU posted a decline in february i.e. exports to hong kong were down 37% in four months; exports to japan down 19.5% in four months; exports to germany down 24% in four months; exports to the u.k. down 33% in four months; exports to the netherlands down 33% in four months; exports to france down 26% in four months.
on the other hand, imports from brazil rose 81% yr-yr; total imports from all sources increased 35% yr-yr. as commodity imports soar in both value and volume secondary to greater demand and price inflation, it is alarming to note for example, that imports of soybeans are up 51% yr-yr in volume terms but 167% in value terms; imports of crude oil are up 18% yr-yr in volume terms but 78% yr-yr in value terms; a 115% yr-yr increase in imports of iron ore (value terms) was recorded amid an all time high of 38 million tons imported (volume). its hard to see this pace slowing much since the 24 month average of iron ore imports has more than quadrupled since 2002.
on top of this we have china's most recent cpi numbers demonstrating that the acceleration in the yr-yr rate of inflation has doubled since june! inflation is affecting every sector of the chinese economy. consider the pace of meat price inflation is up 45% yr-yr; residential housing cpi numbers reveal a 50% yr-yr increase since last year.
the accelerating appreciation of the yuan has done nothing to decrease the acceleration in inflation so it is difficult to imagine that a one-off adjustment will do anything more than temporarily put a band-aid on the problem. it is the plunge in the value of the dollar that acts to support the price of dollar-based commodities. despite the 9% appreciation in the yuan, the rate of change in the value of the crb index when denominated in the chinese currency remains in hyper drive to the upside, approaching 30% on a yr-yr basis and shows no sign of deceleration. a one time adjustment to the chinese currency will not be able to stem domestic food price inflation. how can it when there are substantial supply issues and real interest rates in china remain negative?
despite negative real rates, chinese equities appear poised to be ready for a fall, completely contradicting any "decoupling" theme. it is noteworthy that this is the first time since the inception of the chinese stock index ishare that there has been a negative reading in the medium term oscillator.
the largest creditor and holder of paper u.s. dollar assets is watching the world's largest debtor engineers a dollar crash.....and although the chinese have been net sellers of us treasury bonds over the past year, they are essentially "trapped" holding a very rapidly depreciating asset. they will take a huge and very ugly hit as they watch the value of their years of "savings" begin to dissapear before their eyes.
decoupling is a fantasy.
By kevinfischer2002 - 3/13/2008 6:07 AM
Retail sales actually slowed if adjusted for inflation, consumer durables, autos and housing related stuff all slowed, Retail sales growth are let by precious metals which strictly speaking are not reall consumption by savings.
Kevin is very right to point out a lot of painful adjustment of structural imbalance in both US and China will come faster when dollar fall turn into a plunge
1. What happens to nominal Rmb is far too limited to tighten monetary condtion enough to contain price pressure, inflation will be forced on China through commodities prices and rising wages
2. Rising effective rate is /will erode export and employment, gradually spill overinto FAI and asset prices
3. With 10% employment in export and high productivity, export volume growth less than 20% will result in job loss/overcapacity. look out for 5-10m unemployment in export sector alone in next 12 months.
3. Capital flow to Rmb based asset should gradually slow when final leg of nominal Rmb rise is replaced with vicious inflation
By isaac - 3/13/2008 5:44 PM
All five comments are very good points. Meanwhile the US and G7 countries are slowing, the dollar is plummeting, inflation is rising, and the authorities in China are making more and more noise about money inflows. The timing of all this could not be worse. The important lesson here is to make difficult adjustments during optimal conditions, or you will be forced to make them when it is most painful. That is much easier to say than to do, of course. I am very curious to know what kinds of discussions are being held in Zhong Nan Hai. I would guess that people are nervous. And all this Tibet activity today can't make them feel much better.
By Michael Pettis - 3/13/2008 6:54 PM
We all agree 2008 is a difficult year. Some day the game's gonna end.
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.
Subscribe to this Site
Comments (7) for "More attention on the RMB"
December, 2007
.