The first [myth] is that the development of China’s cities is truly unique and unprecedented in global experience. As it turns out, China is by no means the most urbanized country in the emerging market world – in fact, China is slightly below the international average, even for low-income countries. And by no means the fastest-growing, as other Asian countries have seen much faster urban development. Lest you think this is a particular worry for the mainland, it’s not; in fact, ultra-rapid urbanization is generally a big problem for developing countries, and we conclude that China’s more moderate pace should be seen as a badge of success rather than failure.
The second is the size of the urban middle class market. Some analysts suggest that more than 300 million Chinese consumers have already crossed the middle income line, making China the largest urban market in the world. But the numbers don’t bear this out. Once we take a closer look at what "urban" really means, we find that less than half of China’s headline urban residents actually live in a city. This means that the current size of the urban middle class is far less than the most optimistic estimates in the press – and the growth of cities is slower than you might think.
From Deutsche Bank China Macro Strategy by Jun Ma and Will Chan, August 17, 2006:
China’s Jan-July urban FAI rose 30.5% year-on-year for Jan-July, slightly slower than H1’s 31.3%. Although the year-to-date growth rate showed only modest deceleration, the implied July year-on-year growth dropped significantly to 26% from 33% year-on-year in June. This monthly FAI trend, together with moderating industrial production growth (to 16.7% year-on-year in July from 19.5% in June), suggests that the real economy is beginning to cool off. These are positive developments that the policy makers and the market should welcome.
Although M2 and loan growth rates remain a bit stronger than what the PBOC would like to see, and the government and central bank will maintain a tightening bias in the coming months, we feel that policies have entered into a phase of "relative stability" in the sense that the intensity of unexpected policy announcements will be substantially reduced in the remainder of this year. In particular, we think that most of the toughest administrative measures have already been announced by now, and the government’s focus over the coming months will be on implementation of these announced policies (eg tighter land supply, project "clean up", stricter entry criteria for new projects, and anti-property speculation measures).
From JPMorgan Economic Research, Greater China by Qian Wang, August 10, 2006:
China’s producer price inflation picked up again, as the July PPI released by the National Bureau of Statistics (NBS) rose 3.6% over year-ago (JPMorgan and consensus: 3.4%), compared to 3.5% in June. Seasonally adjusted, July PPI jumped by 0.6%m/m, adding to the 1.1% monthly gain in June. The underlying trend in producer prices has been picking up steadily in recent months, a consistent message from the PPI released by the NBS as well as the corporate goods price index compiled by the central bank.
In the details, the price increase at the producer goods level was rather broad-based, as seen across rising costs amongst the major categories of evacuation, raw materials and manufacturing. Further breakdown shows that July PPI for crude oil, gasoline, diesel, fuel oil and coal mining, continue to record solid growth, though having shown some moderation in the pace of price increase comparing to June. Amongst the commodity category, the percent oya decline in PPI for ferrous metal moderated further in July, in line with the anecdotal evidence of price recovery in the steel sector. On the other hand, PPI for nonferrous metals, including copper rose modestly at 26.9%oya, compared to 26.8% in June. In addition, PPI for manufacturing jumped to 1.6%oya in July, comparing to 1.3% in June.
From "Not much fizz left in the global economy" by Stephen Roach, printed in the Financial Times, August 13, 2006:
Nor are the two dynamos of developing Asia – China and India – likely to counter the slowing trend in the developed world. China has a seriously overheated economy. With real GDP surging at an 11.3% annual rate in the spring period and industrial output growing at a record 19.5% year-on-year in June, Beijing has little choice but to introduce tightening initiatives. A failure to do so could see trade protectionism squeezing exports and a deflationary overhang of excess capacity leading to an investment bust. China must shift its economy towards private consumption, a sector that sagged to just 38% of GDP in 2005. (A healthy rate would be at least 50%.)
All this points to a moderation of China’s growth beginning in 2007, with attendant reductions in its voracious appetite for commodities. That should spawn additional ripple effects in commodity producers such as Australia, Canada, Brazil and Africa. The world’s big oil producers would also feel repercussions from a Chinese slowdown. As would China’s Asian suppliers, such as Japan, Korea and Taiwan.
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