From “How much hidden energy inflation?” by Jonathan Anderson, UBS economist, December 18:
The current market situation and our forward-looking projections suggest “underlying” price pressure of around 13% in overall energy prices including fuel and electricity going into 2008 – around 1% of the current consumer price index given the combined 8-9% weight in the overall CPI basket. This is hardly a picture of massive repressed inflation lurking in the system; from a macro point of view, Chinese energy prices are not that far away from where they should be. If global oil and coal prices were to continue to rise sharply, that would be a different matter, and we would expect more explicit inflationary pressure. But this is a completely separate discussion from the topic at hand, which is the common investor fear that, relatively, prices are already significantly out of whack.
From “China macro outlook 2008” by Jun Ma, Deutsche Bank greater China chief economist, December 17:
There are two competing forces that will shape China’s growth trajectory in 2008. On the positive side, the momentum of investment growth remains very strong, reflecting 30%-plus profit growth, margin expansion, and ROE enhancement. Consumption growth is likely to remain steady or even accelerate due to positive wealth effects from over 400% [in] stock market gains in the past two years. On the other hand, the deceleration of export growth – reflecting weaker OECD demand growth and China’s domestic policies restraining low-end exports – will likely knock off about half to one percentage-point (ppt) from GDP growth next year … We expect GDP growth to moderate by about 1 ppt from this year’s 11.5% to 10.4%. These growth prospects remain the strongest among major economies in the world and should be positive for commodities demand.
From “China’s SOEs to start paying dividends” by Sherman Chan, Moody’s Economy.com economist, December 13:
The Chinese authorities recently announced that state-owned enterprises (SOEs) will have to start distributing 5% to 10% of their profits in dividends … Whilst this initiative may be China’s latest attempt to control excessive investment funded by retained earnings, it is unclear as to whether it can slow economic activity … First, given the stellar profits made by the SOEs, there are incentives to continue with investment even after taking into account the need to pay dividends. Secondly, the requirement to pay a dividend can be likened to an increase in tax rates, and this may have the effect of boosting consumption to minimize dividend payments as this will directly benefit the SOEs themselves … Higher SOE spending will raise total domestic consumption and this may fuel demand-driven inflationary pressures.