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Tuesday November 10, 2009 - 19:39:24 GMT
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Improbable China part I

This is the first in a two part column on the Chinese economy

On the weekends the line to see Chairman Mao’s’ body in his mausoleum in Tiananmen Square can stretch for blocks. This fall Beijing is full of Chinese tourists. In the Forbidden City, in the Summer Palace and especially in the brand new malls and shopping complexes, groups of rural tourists in matching red or yellow baseball caps troop diligently behind their guides and stare at the big new city.

These travelers are from an older China. They come from the farms and small villages where the majority of Chinese live. In the countryside change is slow and life conservative. But almost all of what they will see in Beijing is brand new. The sleek office towers and highways, the Olympic stadiums and fleets of new cars did not exist 20 years ago; most of modern Beijing was built in the last decade. The sights of the capital must be far more amazing to a farmer from Yunnan or a herder from Gansu than to a visitor from New York, London or Moscow.

But these visitors are not just tourists; this new China belongs to them also. Their attitude and good will matters and maintaining their support for the economic policies of the government is one of the chief goals of the Beijing rulers. If China is to continue to prosper it is these people who must be given a chance for the life that has already arrived for many others in Beijing, Shanghai and Guangzhou.

China largely escaped the ruin that came over Western financial institutions last fall. But it could not avoid the economic effects of the debacle. The Chinese government has attempted to sustain its economy by spending more than $900 billion of its own and state bank’s funds to support its $4.3 trillion economy until the global trade system recovers and demand for goods once again flows to Chinese factories.

Chinese economic growth since the crash of last September has never approached the standard recession definition of two consecutive quarters of negative GDP. Third quarter growth as recorded by the government was 8.9%. It was 7.9% in the second and 6.1% in the first.

These figures are deceptive twice over. China’s population of 1.33 billion is still growing though only 0.65% a year and the government estimates that 8.0% GDP expansion is necessary just to give each year’s new workers employment. But internal migration of rural agricultural workers to the cities and economic development zones is adding uncounted millions more job seekers to the unemployment roles of the new industrial China. These workers have to be accommodated or sent home.

Obtaining an 8% year on year increase in GDP is the bare minimum acceptable to the Beijing economic planners. In the minds of the central authorities anything lower risks the civil unrest that has so often in China’s history shaken the hold of the central government.

The 7.7% National Bureau of Statistics growth estimate for the first three quarters of 2009 is best viewed, and probably by the government as well though not in official pronouncements, as a successful stop gap rather than a permanent accomplishment because it has been produced by an expenditure of savings rather than a permanent advance in capacity to meet expanding demand.

Is it really surprising that a cash and credit stimulus over a year worth almost one quarter of national GDP has produced a burst of economic action? How could it be otherwise? But even the reality of the 8.9% growth can be called in question.

Various secondary statistics including year over year figures for exports, down 23.0% in July, 23.4% in August and 15.2% in September and imports, off an average 11.8% monthly in the third quarter do not draw a picture of economic expansion let alone 8.9% activity. The Chinese economy is almost 40% dependant on exports for GDP; if exports are not increasing what is generating the demand for Chinese products? Domestic consumption, retail sales?

As with the astonishing figures for auto sales, 70.5% higher in July, 94.7% in August and 83.6% in September which are supported by government purchase incentives, retails sales statistics are likely inflated by provisions that do not reflect actual end consumption. Retail sales rose an average of 15.36% per month year on year in the third quarter and 15.00% monthly in the second. But sales statistics include goods produced but not yet sold, the equivalent of inventory and sales numbers in the United States. Although it is probable that the Chinese economy is growing due to the massive government involvement it is improbable that it is expanding as rapidly as reported by national statisticians.

In purely anecdotal observations over the past week the malls are full of people but buyers are few and even department store clerks resort to actively touting their goods. Everyone questioned considered prices in the property market to be highly inflated. The status of private real estate in China is unclear. Typically seventy-five year property leases are treated as ownership and bought and sold.

China’s willingness to do what is necessary to keep its economy growing and having amassed the ability to do so on her own can certainly be applauded but Beijing’s actions should not be mistaken for an altruistic contribution to global economic well being.

It is understandable that the world should look to China as the new economic savior. But China alone cannot support the global economy. If lower consumption and GDP have really arrived in the United States, they will not be far behind in China.


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GVI Trading. Potential Price Risk Scale
AA: Major, A: High, B: Medium

Tue 31 July 2018
AA JP- Bank of Japan
A 06:00 DE- Retail Sales
A 09:00 EZ- flash HICP/GDP
AA 12:30 US- Core PCE Deflator
A 14:00 US- CB Consumer Confidence
Wed 1 Aug 2018
A Final Mfg PMIs
AA 12:15 US- ADP Private Payrolls
A 15:00 US- EIA Crude
AA 18:00 US- Federal Reserve Decision
Thu 2 Aug 2018
AA 11:00 GB- Bank of England Decision
A 13:30 US- Weekly Jobless
Fri 3 Aug 2018
A Final Services PMIs
AA 12:30 US- Employment
A 12:30 US/CA- Trade

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