Saturday 13 December 2008
China’s Economy Sliding Deeper
A series of figures show the Chinese economy will continue to slide before recent economic stimulus policies become effective. And it may be too early to declare that the economy would bottom out in November. It is concluded at the Central Conference on Economic Affairs that pressure on economic sliding is growing heavier and enterprises facing more operation difficulties.
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China’s Economy Sliding Deeper
Zhou Jiangong, Shanghai
12 December 2008
A series of figures show the Chinese economy will continue to slide before recent economic stimulus policies become effective. And it may be too early to declare that the economy would bottom out in November. It is concluded at the Central Conference on Economic Affairs that pressure on economic sliding is growing heavier and enterprises facing more operation difficulties.
According to National Statistic Bureau ( NSB), CPI grew by 2.4% year on year in November, about 100 bps lower than domestic and overseas economists’ estimation. Since CPI growth was still high in April this year, it is expected to approach zero or turn negative in spring.
Year-on-year PPI growth was 2% in November, the lowest of the recent 31 months. In fact, the figure is somewhat distorted. Although the international crude oil price has dropped by 70% in recent several months, according to NSB, factory prices for petroleum, diesel, and kerosene still went up by 19.7%, 7.9%, and 22.3% respectively in China. If the Chinese government lower oil product prices in line with the international market, it’s not surprising if PPI sees a negative growth.
Of Foreign trade figures in November, the most stunning in November is not the first contraction of China’s monthly exporting in 7 years, but the drastic drop of the monthly imports and $40 billion trade surplus, a record high. Steep import decline to some degrees means China’s domestic demand is dropping more rapidly than the demand of the international market, indicating a stronger momentum of economic sliding.
These figures basically demonstrate the Purchasing Manager Index, a leading indicator of the macro economy, which was declared to be 38.8 at the beginning of November, the lowest since January 2005 when the index was launched. Usually PMI higher than 50% shows general economic expansion and the one lower than 50% shows economic recession.
In detail, new export order index dropped by 12.4 percentage points, the highest among all leading indicators. As the economic recession of G3 (US, EU and Japan) has not reached the bottom, zero or negative export growth may occur in the coming months or even the first six months of 2009. In fact, China’s import and export amount totaled $189.89 billion in November, 9% down year on year, import amount alone dropping by 2.2% to $114.99 billion.
Among PMI sub-indexes, import index dropped by over 7 percentage points, but the fact is that the imports dropped much more than what has been indicated, showing economic stimulus policies have seen no effect in November and the economy is still shrinking.
Deflation is looming over the whole world. The yield of the US short-term treasury bills dropped to below zero due to investors’ strong deflation expectation for the coming months. As oils prices stay low, yen appreciates, and unemployment rises, generally Japan is doomed see deflation. Merrill Lynch predicts Japan may suffer “deeper deflation” that would deepen to 2 percent in August 2009.
Under such circumstance, China should maintain stable RMB exchange rate. Policies designed to increase export would be self-defeating as global demand shrinks and deflation is threatening China’s major trade partners. If the government encourages exporting a product by RMB depreciation or by other export-incentive policies, it may trigger price decline of products of the same type on the international market and this will further influence the domestic market. And the vicious cycle would finally offset the gain from export and even lead to negative effect.
So it follows that the Central Conference on Economic Affairs decides to stabilize external demand and expand internal demand, instead of expanding external demand. Correspondingly, China needs to maintain the stability of RMB exchange rate.
All these figures show China’s economic growth is slowing down and keep contracting, and November was not the bottom. Now the key is the effect of the economic stimulus policies. If the effect turns to be weak, the government should come up with more stimulus policies.
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