More numbers have been released. In today's South China Morning Post we read that:
Mainland industrial output slowed more than expected last month after tax changes made exports less attractive, suggesting to some economists that the country’s politically sensitive trade surplus may shrink in coming months.
Factories churned out 18 per cent more goods than in July last year, down from 19.4 per cent growth in June, the National Bureau of Statistics said on Wednesday. Economists had expected a rise of 19.2 per cent.
One correction -- I think a Bloomberg poll had economists forecasting an 18.5% rise, but in either case it is lower than June's number and lower than forecast. Is this reduction in the growth of industrial output a good thing? In one sense yes. It is clearly better, as I see it, for the growth rate to move down rather than up.
According to my model China is caught in a trap in which the rising trade surplus increases the domestic money supply (since the PBoC is forced to act as the residual buyer of net capital inflows). This increase in money supply expands production either directly, by increasing investment, or indirectly, by supporting rapid loan expansion, which in China is far more likely to go into production than into consumption.
Since a country's trade surplus is simply the excess of its production over its consumption, anything that causes faster growth in production relative to consumption will increase the trade surplus, which starts the whole process all over again. The system is exacerbated by FDI, which comes into China to take advantage of cheap asset prices, and hot money inflows, which enters China to speculate on high returns (including the expected gain on currency appreciation).
If you agree with that model, you would probably also agree that anything that caused a decline in the industrial output growth rate is a good thing and helps ease China out of this trap. But before we celebrate let me quote something I wrote in the June 2007 issue of Far Eastern Economic Review. I was discussing 2007 first quarter numbers:
Industrial production was up 18.3% over the same period last year, a 10-year record (versus an already high 16.7% for first quarter 2006). With this level of growth in industrial production, it is unrealistic to expect a narrowing of the trade surplus any time soon, and if the trade surplus doesn’t narrow, neither money growth, loan growth, nor investment is likely to slow down.
So July's lower number (18.0%, versus 18.5% growth for the first seven months of 2007) is certainly better than what we have been seeing, but it is not a number we should be too happy about. Industrial output is still growing at very high levels -- well above its average for the past four years. In addition, it may be that the growth slowdown was caused by the reduction in loan growth that we have experienced over the past three months (compared to the first quarter). This suggests that administrative measures to reduce credit expansion are working, but I am very skeptical about the effectiveness of administrative measures except in the very short run.
We will need many more months of declining growth rates before we can relax. Tomorrow fixed asset investment numbers come out.
"If you agree with that model...":I do, but would add that the low, pegged exchange rate still wags the domestic dog (Martin Wolf's metaphor). Should China revalue?
By dan berg - 8/14/2007 10:47 PM
They should and they will. Until they alter the exchange rate regime I believe it will be almost impossible for them to get out of the trap they're in (unless of course a global liqudity crisis resolves that problem for them).
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 (2) for "Industrial production is up ...
November, 2007
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