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. Nonetheless at 17.5% growth is still too fast, and as long as industrial production grows faster than consumption, it will continue to put upward pressure on exports.
If you believe that the root cause of the excess growth in China is the self-reinforcing relationship between monetary expansion and the trade surplus, then you would expect this reduction to be temporary. I do. 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.
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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January, 2008
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