Tom Orlik, a very thoughtful freelance journalist based in Shanghai, with a real bent for finance and economics, was kind enough to send me his translation of a recent Caijing (probably China’s best business magazines) article on China’s economy.
I liked the anlysis so much, I am running Tom’s translation in full, below:

China’s GDP growth for 3Q08 came in at 9% yoy, down significantly from 10.1% in the second quarter and the slowest since 2004. Here are a few insights culled from my translation of Caijing’s analysis (for those who don’t know Caijing is like the Chinese equivalent of the Economist magazine):
Weak external demand and rising input prices dented growth in industrial production and profits. An 11.4% yoy growth in industrial production in September, down from 12.8% in August, was the slowest since 2002. Growth in industrial profits in the first 8 months of the year fell from 30% yoy in 2007 to 19.4% yoy in 2008. If you strip out power producers and oil refiners – who are both squeezed between high input prices set by the international market and low output prices set by the government – the picture is probably considerably better, though still not as good as 2007.
Export growth for the first 3 quarters decelerated to 22.3% yoy, a drop of 4.8% from the first three quarters of 2007 on weakening external demand. Import growth accelerated to 29% yoy, an increase of 9.9% over the same period last year, on ongoing robust internal demand and high raw material prices.
In the first 3 quarters, Fixed Asset Investment (FAI) growth increased to 27% yoy, up 1.3%. With FAI apparently robust, the government will have pause for thought about the much-predicted fiscal boost to infrastructure spending. With private sector investment holding up, the government will not wish to bid up the prices of raw materials with its own energy and raw material intensive investment programme.
Domestic consumption appears to be holding up, with retail spending for the first three quarters up 22% yoy, 6.1% more than in the same period in 2007, and retail spending for September up 23.2%, holding steady with the figure for August. Caijing points out that taking account of lower inflation in September, retail spending has actually increased month on month, though spending in August is normally slow because of holidays. In any case, it appears that the Olympics did not have a negative impact on spending.
CPI for September dropped further to 4.6% yoy from 4.9% in August on last year’s higher base effect and an ongoing stabilization in food prices. Factory gate inflation fell from 10.1% in August to 9.1% in September. The still high reading for producer price inflation indicates the ongoing build up of upstream inflationary pressure. The ongoing fall in the CPI, however, will mean the government has increased leeway to introduce pro-growth policies in the remainder of 2008 and the first quarter of 2009.
The government’s main priority will now be to introduce policies to prevent a hard landing and this will be the focus of the meeting of Communist Party leaders in November. Caijing notes that because of the US financial crisis a prolonged slowdown in export growth is to be expected. They suggest policies to strengthen domestic demand are the best and most likely option for the government. In particular they propose: 1. expanding medical insurance and constructing a rural health care network; 2. increasing the provision of affordable housing; 3. an end to control of food prices combined with food subsidies for poor people; and 4. a tax cut for middle income families to help boost domestic consumption. With these policies, GDP growth could be increased by 1.5-2% – enabling China to achieve GDP growth in 2009 of 8.5%-9.5%.
Finally, Caijing notes, the main difference between the current financial crisis and that in 1997, is that back then many companies were state owned and therefore more able to ride out troubled times. Now, more companies are publicly listed or privately owned, so they are more likely to respond to low demand by cutting production or going out of business.

I’m buying it. Are you?

  • greg

    The slowdown of China’s economic growth is the headline news in both Wall Street Journal and Financial Times today, which just shows how closely the world is watching the performance of China’s economy as one of the growth engines of the world economy.
    However, it’s easy for casual observers to be confused to attribute directly the slowdown to the on-going financial crisis around the world.
    The latest (Q3) economic statistics are actually rather confusing. Among the three growth drivers of domestic consumption, investments and export, consumption and investment growth were as high as ever; export slowed but still registered double-digit growth. In other words, the world financial crisis has not affected Chinese consumption and investment at all, although export has just started to be affected with more weakening ahead. The substantial reduction in growth rate is believed to be mainly due to the “de-stocking” process, i.e., business cutting down production but to meet demand with inventory. This is consistent with Caijing’s opinion that more of today’s Chinese companies are public-listed or privately-owned and therefore are more sensitive or responsive to market (or market sentiment).
    The current economic slowdown is more the result of China’s own business cycle and internal policies than the world-wide financial crisis. The Chinese government has been aggressively tightening monetary supply, raising interest rate, and allowing RMB to appreciate quickly since last year. The new labor law doesn’t exactly help in the short term either, especially for the export industry.
    The export is going to get worse, but won’t collapse completely. The risk is for the Chinese government to overreact or respond with wrong policies. While the last five years are probably the best five-year for China in terms of high growth and low inflation, China’s economic development model has become increasingly unbalanced and unsustainable for such a large economy. China needs to rely less on export, more on domestic consumption. The internal demand has to come more from consumption, less from investment. In other words, it’s ok to employ some short-term, anti-cyclical polices, but it’s more important to focus on the long-term, structural reform. For example, it would be a really bad policy to pump up the real estate price in order to boost the growth rate.
    There are good signs that Chinese government is fully aware of the policy implications. The recently-passed land reform policy, the urban and rural health insurance policy initiatives (with the goal to cover 90% of the population by 2010 and universal coverage by 2020) are moves in the right direction, even though it will take some time for these policies to have some impact.

  • Hi Dan,
    Can you edit this into my earlier post after the part where I discuss China’s GDP.
    —-
    And of course, the Economist makes a good argument for China’s Export-Driven GDP to be at a mere 10% of their total GDP (http://www.economist.com/finance/economicsfocus/displaystory.cfm?story_id=10429271).

  • Expat comment

    Very interesting, even for someone without deep financial understanding as myself.
    I was especially intrigued by the health insurance policy initiative… Does this mean it’s worth while to take a closer look at stocks of medical service providers?

  • Renaud

    Just a etchnical remark for the author of the translation:
    “Export growth […] decelerated to 22.3% yoy, a drop of 4.8% […]” should actually be “Export growth […] decelerated to 22.3% yoy, a drop of 4.8 POINTS […]”
    This is a lawyer’s blog, so all the details are important, lol

  • Jim
  • greg

    @Jim,
    At least one Nobel Laureate in 2001 Economics, Michael Spence, is:
    “China’s faced challenges for the last 30 years, when they started reforms, people bet against them every year, and every year we’ve been wrong, [laughter] so this is not a good time to start betting against them.
    They have enormous fiscal and other resources. Their debt to GDP ratio is tiny. They have a huge batch of government revenue, and they’ve done this before. In 1997-98, we, the United States government, and and the IMF, asked them not to devalue into that disaster, in Asia, and they didn’t. Highly responsible action.
    And Zhu Rongji poured billions into the economy, uh, to stimulate domestic growth. And and it’s…it’s perfect for them anyway. Their savings rate is you know, ten percent above the investment rate. At 55 percent, they might as well consume a bit more right now. So, I think they will hold it at eight, eight-and-a-half percent.”
    This is from Squawk Box, CNBC today:
    http://www.cnbc.com/id/15840232?video=901183981&play=1
    Source credit: perspectivehere@ http://blog.foolsmountain.com/

  • steve

    Greg, what I can say is that ‘we wait and see’.

  • ceh

    as communist slogans go:
    只有资本主义可以救中国
    (only capitalism can save China)
    只有社会主义可以救美国
    (only socialism can save America)