Research Dept. News
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Monthly Report, num 285 - November 2005
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International review - China
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China continues to grow but without inflationary pressures
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China growing through investment and exports while avoiding inflation.
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China’s economy grew by 9.4% in the first nine months of 2005 which suggests a continuation of the high rate of economic activity in the third quarter. Investment and exports continue as the main engines of growth, well above private consumption which remains the big unresolved question in the economy of this Asian giant and the central bank has publicly expressed its concern about this matter. A major part of investment is going into removing bottlenecks in infrastructures and energy production, so that inflation pressures still seem far off, as the figures would indicate.
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On the supply side, in the third quarter the industrial sector continued to lead with highest growth while services increased their progress slightly. In this respect, as in so many others, China has a unique economy. Industry represents 56.9% of its nominal gross domestic product, a rate which does not stop growing, whereas services are tending to drop.
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Industry, mainly heavy industry, dominates.
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Supply indicators are coherent with the surprising macroeconomic stability shown in the statistics. Industrial production, especially important in China due to the relative weight of industry, continued to grow above 16.0% in September. At this time, China seems able to absorb nearly all the overall growth of this indicator which is diminishing in countries such as the United States and Japan. Heavy industry continues to grow more rapidly than light industry, while the relative weight of the state sector compared with total industry in August held at the same figure of 39.8% seen in July, which demonstrates the rigidity being encountered in reducing the state conglomerates.
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Trade surplus shows explosive growth because of easing off in imports.
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The strength of China’s awakening is also confirmed by the level of various production figures. In the past 12 months ending in August, compared with the same period last year, electrical power generation continued its upward move. Production of motor vehicles and cement, which appeared to be slowing down at the beginning of summer, is now showing new drive. Finally, production of personal computers deserves special attention with year-to-year growth of 70.5%, a rate into which it has settled for three consecutive years. The amount of value added on each computer of specifically Chinese origin may still be small but this is growing.
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Retail sales growing but not as fast because of moderate domestic consumption.
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It is on the demand side that China’s economy shows up weakest and this is the cause of the central bank’s concern. Retail sales in August grew by 12.7% year-to-year. Even taking into consideration the high level, the profile shows something of a slowdown.
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In spite of the level of economic activity, prices continue to show more moderate increases. In September, consumer prices rose by 0.9% year-to-year. Such moderation can only be understood in a situation where consumption is growing less than investment.
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The foreign sector holds a notable place in China’s overall economy and is the cause of fairly common pressures. The most closely watched indicator is the explosive trade surplus. In the 12 months ending in September, it reached 96.38 billion dollars, an amount five times higher than in the same period last year and it has now come to represent 5.0% the Chinese economy. The sharp increase in the trade surplus is expected to contribute 30% to the growth of the economy in 2005. These are big figures but they are increased by the current renmimbi exchange rate. The trade balance is valued at international prices which are higher than the prices operating inside China and this means that in real terms, discounting price differences, the effect is much lower.
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In this respect, growth rates are high but their peaks have lagged behind. Exports rose by 32.2% year-to-year while imports were up by 19.2%. Within this sharp growth we cannot now speak of an upward trend but rather of an easing off, especially in the case of imports, this being the main cause of the rapid increase in the trade surplus.
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By product, exports of manufactured goods in the 12 months ended August grew by 33.6% while imports were up 15.4%, half the January figure. What is significant is the sharp drop in imports of machinery and electronic equipment. If we compare growth in August with January, we find 3.8% in Germany as against 30.1%; in Japan 4.6% as against 26.0%: in Taiwan 15.3% as against 30.8% and in Spain 17.7% as against 58.9%. In raw materials, imports are growing at a considerable rate but less than in 2004. Steel imports rose to 10.8%, a fifth of the average in 2004.
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