International | Nov 16 2009
By Andrew Nelson
It is becoming increasingly accepted that China, one of Australia’s most important trading partners, has put the GFC behind it, with the economy now expanding at a solid pace. The country has boasted double-digit annual growth rates for retail spending, investment and production, which means if anything, concerns are now about the economy overheating.
Some of the stand out results included retail sales growing at a 16.2% annual rate in October, the fastest rate of growth in 10 months. Retail spending has been growing at a double digit annual rate for about five years. Helping drive this result were consumer prices that were down 0.5% on a year ago, which is the slowest pace of deflation in nine months. Producer prices were 5.8% lower than a year ago, which is the slowest rate of deflation in this read for eight months.
At the same time, industrial output expanded at a 16.1% annual pace in October, up from 15.5% in September. This is the fastest growth rate in 19 months. The nation’s urban fixed asset investment, such as spending on roads and power plants, grew at a 33.1% annual pace in the first ten months of 2009.
Chinese exports were 13.8% lower than a year ago, but imports were 6.8% down on year ago levels. All up, China recorded a trade surplus of US$24bin in October, which was well above forecasts for a surplus of US$19bn.
This strong start to the quarter has many predicting even stronger growth in the fourth quarter, as much of the positive trends on show were largely propelled by domestic demand, which continues at a healthy pace. At the same time, it is beginning to appear that external demand is also starting to show some real signs of improvement, which is evidenced by the continued slowdown in the pace of export decline.
Adding to the predictions for a positive fourth quarter are comments from economic forecasting house IHS Global Insight, which notes that decreasing headwinds in the exports sector, coupled with tailwinds in the form of stimulus-driven capital spending, are providing a big base effect in the final months of this year and will almost certainly see the Chinese economy book an even stronger final quarter. The end result, notes IHS, will be GDP growth that surpasses the government’s target of 8%.
The team from IHS notes that China’s GDP growth had already accelerated to 7.7% year on year after in the first three quarters, up from a 6.1% rate in the first quarter of the year.
However, what the current numbers don’t show is just how much of the strong performance is due to what has been an “ultra-stimulating macroeconomic policy”. Thus the main problem will be how exactly to contain the current asset market bubble that has been brought about by the massive injection of liquidity to date.
Yet IHS notes that the neutralising of stimulus policies has at least begun to happen over the past couple of months. The team points out new industrial policies to control investment expansion in sectors with overcapacity problems and more stringent oversight of bank lending to prevent the flow of bank loans into the asset market. In fact, bank lending has already dried up dramatically over the last four months, notes IHS, with lending in October already back to pre-crisis levels.
Much like IHS, CommSec chief economist Craig James thinks that Chinese authorities will need to keep a close watch on just how current monetary and fiscal stimulus is wound back to ensure that current expansion remains sustainable. This view has IHS thinking that interest-rate hikes are unlikely to be seen any time soon given the broad and somewhat unpredictable impact on all sectors that would result.
Commonwealth Bank economists are also in-line with this view, noting the Peoples Bank of China (PBoC) has made it fairly clear that while inflation expectations are important for monetary policy, the real issue is liquidity. So despite comments by the PBoC about maintaining a moderately loose monetary policy, the team from CBA notes that policy can remain loose and still be tightened. The bank predicts that tighter policy is likely to first take the form of a stronger currency followed by higher interest rates and/or bank reserves.
Economists from Danske Bank also note that there is increasing political pressure on China, not only from the OECD, but from within Asia as well to let the yuan rise. And with exports recovering and leadership sounding more confident about growth, Danske believes the conditions are ripe for a change in China’s exchange rate policy. The Danish bank expects a gradual appreciation of the yuan to be resumed by mid 2010, although it notes there is an increasing possibility that it could start earlier.
With the RBA paying close attention to China and its influence on the Australian domestic economy, CommSec’s James thinks the latest data from Australia’s major trading partner will give the RBA even more confidence than it already had that it did the right thing by lifting rates in October, despite some calling the move premature.
