With the central government pumping big money into the economy, as much as 100 billion yuan by the end of 2008, indicators ranging from industrial production to credit show a slowing of the recent economic slide. Expectations are building for Plan B.
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Indicators Show China’s Economy Breathing Easier
CSC staff, Shanghai
14 January 2009
With the central government pumping big money into the economy, as much as 100 billion yuan by the end of 2008, indicators ranging from industrial production to credit show a slowing of the recent economic slide. Expectations are building for Plan B.
Signs of bottoming in manufacturing sector
Signals of economic easing emerged in December, as power consumption and some sales began to rise and inventory stocks were decreasing.
China’s Purchasing Manager Index (PMI) released in January showed a 2.4 percentage point rebound. Among sub-indicators, those for production, new orders and purchasing prices rose significantly, showing downward pressure in the manufacturing sector was being relieved.
Prices for producer goods continued to decrease in December, according to China Logistics Information Center figures, but due to stabilizing prices for steel and raw chemical materials, the fall was slowing, and prices for some products had reached bottom and begun to rebound.
The steel industry is seeing the most significant bounce. Benefiting from the government’s positive fiscal policies, market demand turned up in December, and raw material prices for iron ore, billet, steel scrap, and coke are also rising.
Some steel companies said they maintained only a small production of medium and heavy plate when steel prices dropped to their lowest point last year, but they had now restored 80% of normal production. They worry, though, that it will take time for end user demand to be restored.
PMI is yet under 50, meaning firms are still cutting production. But Nomura economist Sun Mingchun believes the increase in new orders for infrastructure construction and other projects due to the government’s stimulus package is having an effect and inventory stock adjustment may end soon.
Power consumption up
Industrial power consumption reveals the degree of activity in manufacturing. According to the China Electricity Council, in December, total power consumption reached 0.27 trillion kwh, a drop of 6.5% year on year, but 6.8% higher than in November.
“It’s beaten expectations, proving the current economic situation is not so bad as we once imagined,” a China Electricity Council director told China Business News.
In line with Council figures, China International Capital Corporation (CICC) predicts that the year-on-year growth of industrial value-added in December will also be higher than the 5.4% growth in November.
CICC power industry analyst Chen Junhua says the 14% power consumption growth in heavy industry over the previous month puts month-on-month growth in December over expectations.
Favorable power pricing policies launched by local governments for some industrial enterprises during certain hours have been promoted in 8 provinces since December. Enterprises in seven industries, including electrolytic aluminum, chlor-alkali, carbon, yellow phosphorus, calcium carbide, steel, and ferroalloy (including industrial silicon), qualify to enjoy these policies.
“You can see this has greatly lifted power consumption in heavy industry. As these firms begin to restore production, power consumption in the first quarter should see steady growth,” said a China Power Investment Corporation expert.
Credit scale growing rapidly
Another important indicator, commercial banks’ new lending, also grew rapidly in December.
Financial firms’ new loans reached 740 billion yuan in December, the highest monthly increase since January last year.
The People’s Bank of China (PBoC), China’s central bank, recently cancelled the lending limit for commercial banks. An industry insider said, though, that commercial banks normally lend briskly at year’s end to reach their annual credit goal. “To fulfill their quota, sometimes banks lend money to friendly companies in December and get their money back early in the year. Lending figures for January are a more accurate guide to credit scale.”
In January, 2008, commercial banks lent intensively under the pressure of tight monetary policy, and the total loan amount in that month boomed to 803.6 billion yuan. As monetary policy tightened, new lending declined month by month until the end of the year, when the central bank canceled lending limits and increased liquidity by cutting the deposit reserve ratio.
During a PBoC working meeting held at the beginning of January, it set the goal for annual currency supply 3 to 4 percentage points over GDP growth, aiming to increase M2 supply by about 17% in 2009.
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