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?