A focus on growth

From “Macro Roundup: Risks Shift From Inflation to Growth” by Alaistair Chan, Associate Economist, Moody’s Economy.com, September 12

China’s success in dealing with its inflation problem … hides the fact that the underlying monetary conditions are largely the same … Fixed asset investment shows little sign of slowing, and rose 27.4% y-o-y in August … Retail sales growth was also unchanged, at 23.2% y-o-y. The dip in industrial production growth, to 12.8% y-o-y from 14.7% in July, is negligible … Monetary aggregates, as measured by M2, grew 16% y-o-y, compared to 16.6% the month before. The decline in money growth appears to be due to the government’s controls on foreign cash inflows … Nevertheless, the numbers feed into a second interpretation: that China remains in the grip of extremely loose monetary regime … This results in a huge amount of export revenue, and hence a huge amount of money needed to be printed by the central bank to swap with exporters for their foreign exchange. This would explain the continued strength of fixed investment … The August foreign trade numbers are interesting … If you are of the view that China’s trade surplus is a function of a necessary inflow of foreign exchange, then a slowdown in external demand would be met with a decline in imports … But if you take the view that China’s inflation is not a monetary problem, the higher trade surplus could simply be due to the reduced cost of oil imports.

From “China Cuts Rates to Send A Clear Signal” by Wang Tao, UBS Chief China Economist, September 15

We think the rate cuts sent a clear signal to the market that the government is concerned about the growth outlook and the weak market sentiment, which could have been weighed down even more by bad news from Wall Street. The sharper-than-expected drop in CPI inflation in August, to 4.9% from 6.3% in July and 7.8% in Q2, and the recent sell-off in the commodity and energy space, provided room for the government to focus more on growth. Beyond the signaling effect, we think the interest rate reduction will help lower corporate borrowing costs, and the cut in reserve requirements will reduce the funding costs of the smaller banks. However, credit expansion is still constrained by the relatively tight lending quota, not interest rates or reserve requirements (at least not the large banks and the banking sector as a whole). 

From “China Data Outlook” by Grace Ng, Qian Wang and Peng Chan, J.P. Morgan economists, September 3

China’s fiscal conditions have been consistently improving … The national government’s overall financial balance turned into a surplus of US$10.3 billion (0.3% of GDP) in 2007 – the first full-year surplus since 1985. During the first seven months of this year, total government revenue grew 30.5% y-o-y, continuing to outpace expenditure growth. This impressive improvement in the fiscal balance occurred even as government spending expanded … and despite a tax reduction for domestic enterprises and the lowering of the income threshold for personal income tax since early this year … Among the major tax revenue items, total value-added tax collections have so far kept up impressive growth … The government’s finances remain solid: the fiscal surplus increased a remarkable 32.1% y-o-y during the first seven months of this year … The authorities have ample room to step up public infrastructure spending, even alongside a potential reduction in tax burdens for households and smaller enterprises to offset the impact of slowing global growth on private sector activity.

From “Macro China: Life after the Games” by Ken Peng, Economist, Citigroup Global Markets, August 26

After power shortages, energy security will likely take a high priority, but environmental concerns present a constraint … The reality is China produces 77% of its power with coal. If the economy were to continue growing at about 10% a year, power consumption would likely increase about 15% … thermal power from coal would continue to dominate generating capacity for a long time … The five-year plan’s main theme for thermal power is to reduce small and old generators and install large ones … About US$292 billion of investment would need to be made before 2010 … The plan aims to produce 30% of the total power needs from renewable sources by 2020, up from 23% now. Together, [investment in renewable sources] could amount to US$44-US$73 billion through 2010 … Moreover, the planned upgrading of the national grid system for power transmission could also add another US$73 billion. Combined, investment in power infrastructure could be at least one-third larger in the second half of the five-year plan than in the first half.