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Thursday, September 11, 2008

Is China on the Rocks or Not?

I can’t walk to the water cooler without hearing from someone how China’s economy is deflating like a balloon. Oh really? Let’s look inside the latest Bloomberg story, “China Inflation Cools to 4.9% as Export Growth Slows,” and see what’s happening.

Sept. 10 (Bloomberg) -- China's inflation weakened to the slowest pace since June 2007 and export growth cooled, stoking speculation the government will cut taxes and ease loan restrictions to spur the world's fourth-largest economy.

XX Sean’s note – that sounds bad, eh? Read on!

Consumer prices rose 4.9 percent in August from a year earlier, less than economists estimated, after gaining 6.3 percent in July, the National Bureau of Statistics said today. Exports rose 21.1 percent in August, down from July's 26.9 percent gain, the Customs Bureau said.

XX Sean’s note – nonetheless, exports rose 21%! Does that sound like an economy in trouble? If America’s exports rose 20%, Wall Street would smile a smile so broad they’d out-dazzle the sun.

Stocks rose, erasing earlier losses, on expectations China may lower taxes, slow the yuan's gains and ease lending restrictions to protect jobs at exporters after four quarters of slowing economic growth. Cooling inflation also leaves room for the government to counter power shortages by raising energy prices, encouraging refiners and generators to boost output.

XX Sean’s note – so, China is going to stimulate the economy? Won’t that make it heat up?

China's producer prices climbed 10.1 percent, the fastest pace since at least 1996, after rising 10 percent in July, today's data showed.

XX Again, a 10% rise in producer prices is not exactly what you expect in an economy that’s deflating. Now, contrasted with the rise in consumer inflation (4.9%) it’s obvious that Chinese producers are absorbing some of the cost pressures. That may be a problem for the Chinese stock market, but I don’t see how it’s a problem for commodity consumption.

XX later in the article we read …

Officials are working on a plan for as much as 400 billion yuan ($58 billion) of tax cuts and spending to prevent an economic slump, according to economists and reports in domestic news media.

XX That’s a heck of a lot of stimulus. Could the Chinese err on the side of overstimulation? Yes. What would that do to commodity prices?

Consumer prices in Japan rose 2.3 percent in July, the fastest pace in more than a decade, while Malaysia's inflation accelerated to 8.5 percent, the quickest in more than 26 years.

XX There’s that phrase again – “the fastest pace in a decade.”

August's trade surplus climbed to a record $28.7 billion as import growth weakened to 23.1 percent from a year earlier, the slowest pace in almost a year, on falling commodity prices. Foreign direct investment pumped another $7 billion into the financial system last month, the commerce ministry said today.

XX And the trade surplus is hitting a record even though China is a big energy importer? What does that tell you about China’s customers? I think it tells us they’re still buying. Meanwhile, commodity prices are down, but we know that. That should just make it easier for people to buy more stuff.

Consumer-price inflation has slowed for four months, edging closer to the central bank's target of 4.8 percent for the year. February's 8.7 percent pace was the fastest in 12 years. Food prices rose 10.3 percent in August from a year earlier after gaining 14.4 percent in July. Non-food prices increased 2.1 percent, the same as in July.

XX I talked about the “Agriculture Bomb” in Wednesday’s MoneyandMarkets column. Sure looks like higher prices aren’t slowing Chinese food consumption.

The expansion in factory and property spending, one of the key drivers of the economy, maintained its pace in the eight months through August. Urban fixed-asset investment rose 27.4 percent to 8.49 trillion yuan from a year earlier, the statistics bureau said today. That compared with a 27.3 percent gain for the first seven months.

XX Really, money is pouring into projects in China.

China's economy expanded 10.1 percent in the second quarter. The pace of growth remains the fastest of the world's 20 biggest economies.

XX Ya think?

In July, the central bank eased restrictions on how much banks can lend by raising 2008 loan quotas for national banks by 5 percent and regional lenders by 10 percent, according to reports by Goldman Sachs Group Inc., BNP Paribas SA, and China Merchants Bank Co.

XX So it’s “easy money time” in China. Later in the story (read through on the link) you’ll see that China is thinking of making lending even easier. We know what happened when we got easy money here in the US – the economy boomed.

XX So is the Chinese economy really hitting the skids as people say? They haven’t proved it to me with this story.


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