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Improbable China Part II
By Joseph Trevisani The Peninsula Hotel in Beijing has far more staff than its counterpart
in New York. Squads of doormen hail cabs, busboys compete for baggage,
water glasses are filled in the restaurant without asking. In the
department stores nearby dozens of sales clerks idly rearrange
merchandise and getting there is simple, Beijing may be the easiest
major city in which to find a cab. Service positions are more than
plentiful in the Chinese capital. Which raises a question about Chinese
business, does it not value efficiency?
The obsession with maintaining or increasing employment represents the
peculiarities of the Chinese economy and the political and social
necessities of governing China. The overriding goal of the government
is to provide jobs and consequently enough wealth to obviate political
disenchantment and dissent.
Chinese society has a long history of rural disaffection and a long
history of respect for students. The first has been manifested many
times of the past decade. Protests are usually in objection to corrupt
officials and practices, in 2005 the government admitted to 70,000
incidents in the prior years. But such disputes can easily become a
condemnation of the central government. This is one reason for
Beijingâ€™s harsh treatment of corrupt official and firms. Execution is a
common punishment for financial crimes. The second was typified by
Tiananmen twenty years ago when normal Beijing residents stood in the
way of tanks on their way to Tiananmen Square, throwing up barricades
to protect the students. It is an event that the Beijing Government
will go to almost any length to avoid repeating and an unmentionable in
In the previous column we looked at GDP growth rates as
reported by the government, 8.9% in the third quarter, 7.9% in the
second and 6.1% in the first, and some possible contradictions. If the
Chinese economy really grew at 8.9% in the 3rd quarter then secondary
statistics should concur. But several important measures cast doubt on
the probability that all is as reported.
For one exports and imports seemed to be out of line. Exports were down
an average of 20.5% monthly in the third quarter and imports fell an
average of 11.8%. The Chinese economy is 38% dependant on exports for
GDP and it seems odd that goods produced for export orders are then not
exported. Imports include both industrial and consumer products, raw
materials, components and finished products. It is counter to logic
that an economy that is expanding at an 8.9 % rate would not need more
imports to produce its manufactures especially since a good deal of
Chinese exports are assembled from imported components.
In this column we will look at a more basic comparison, money supply
and prices. The question is the same, do the statistics make sense? If
the M2 is growing at the documented rates but deflation exists at all
levels of the price chain, are retail sales really expanding at the
reported 15%? Where are the price pressures? If exports are down and
retail sales are questionable is the 8.9% GDP creditable or
Chinese M2 money supply grew at a year over year average rate of 28.75%
in the third quarter, 26.70% in the second quarter and 21.59% in the
first. These are Chinese government figures from the Peopleâ€™s Bank of
China (PBOC) via Bloomberg. At the same time all price measures, from
wholesale goods to CPI, have fallen.
The wholesale price index, the price of goods in inter-business
transactions is down an average of 7.0 % in the third quarter, 7.6% in
the second and 5.6% in the first (PBOC via Bloomberg). The producer
price index representing changes in post production prices dropped 7.7
% in the third quarter, 7.2% in the second and 4.6 % in the first.
Prices of retail goods slid 2.25 % in the third quarter (July and
August only), 2.03 % in the second and 0.8 % in the first. The producer
and retail indices are from the National Bureau of Statistics (NBS) via
Bloomberg. Likewise the purchasing price index (raw materials, fuels
and power) dropped 11.06 % in quarter three, 10.4 % in quarter two and
7.1 % in quarter one (NBS via Bloomberg). And finally the overall CPI
was off 1.26 % in Q3, 1.53 % in Q2 and 0.6 % in Q1. The uniformity of
the price direction is striking.
For comparison United States M2 year on year growth averaged 7.6 % in
the third quarter, 8.6 % in the second and 9.4 % in the first. The US
Producer Price Index (PPI) was down 5.3% year on year in Q3, 4.3% in Q2
and 1.9% in Q1. CPI is down an average of 1.6% in the third quarter,
1.1% in the second and 0.06% in the first.
Chinese M2 grew 3.8 times faster than the US in the third quarter, 3.1
times faster in the second, and 2.3 in the first. However Chinese CPI
is essentially the same as the US and Chinese producer prices at
several levels fell at a much faster course despite more than triple
the money supply growth.
The purpose of this exercise is not to make minute comparison of the
composition of inflation rates and money supply between China and the
United States but to ask the logical question--can M2 grow at these
rates in an economy where GDP is expanding at 8.9% and retail sales are
rising at 15% and not produce appreciably different inflation rates?
And if that is logically farfetched then which parts of the M2, GDP,
retail sales equation is overstated?
Or to put the question differently where is all that money going? It is
not going into goods purchases or production demand because prices are
falling at the consumer level and falling dramatically at the producer
level. Some of this cash must be making its way into the equities; the
Shanghai Exchange is up 73% this year. Property prices are reported
higher in many of the coastal and developed cities but statistical
proof is sparse.
The Chinese Government and the PBOC have flooded the economy with cash
and loans. But money by itself cannot create demand and without demand
it does not even produce inflation. Judging from the price levels in
the Chinese economy consumer demand is minimal. If exports do not pick
up who will buy the products of 8.9% growth?
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