Research Dept. News
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Monthly Report, num 330 - December 2009
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International review - China
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China: moving strongly from the ox to the tiger
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China's growth strategy needs a change in course.
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In a couple of months we'll be leaving the year of the ox, or perseverance, and marching into the year of the tiger, symbol of vigour and power. «Persevere and you will lead» seems to be the slogan of the Chinese authorities, who refuse to give up the era of growth based on investment and the foreign sector in favour of greater emphasis on domestic consumption. The immovable exchange rate with the dollar and unrelenting injection of liquidity undoubtedly continue to yield good results, but if China wishes to go on advancing at levels of 8%-10%, a medium term change in direction is inevitable.
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Industrial production consolidates within the 15%-16% range.
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Early indicators for October consolidate the Asian giant's lively recovery. On the supply side, industrial production surprised once again with an October gain of 16.1% year-on-year, much higher than the 12.3% average of the second quarter. However, October 2008 saw the start of the decline, so we cannot ignore the base effect that will affect this and other indices for several months. Along the same lines, the purchasing managers' index (PMI) for October stood at 55.2, above 50 points for the eighth consecutive month, the threshold separating recession and expansion.
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Vehicle sales up 71.3%.
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Domestic demand also continued to progress, buoyed by exuberant credit. In October, retail sales grew by 16.2% year-on-year, still far from the 22% of the year before but above the average for the second quarter of 15.4%. Vehicle sales remain solid, as indicated by year-on-year gains of 71.3%, although slightly lower than September's figure – 1.2 compared with 1.3 million units. The vitality in domestic consumption comes along with the upswing in the labour market. In particular, according to a survey by the Ministry of Labour, demand for labour has risen in the third quarter after four quarters of decreases. Furthermore, fixed capital investment was up 32.8% year-on-year in October, with an annual average of 32%.
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Although lively demand is an indication of the country's driving forces coming to the fore again, it's still early days to draw any conclusions. Even more so when growth in investment doubles that of consumption and the trade balance surplus for October is up again to 24,000 million dollars compared with a monthly average of 13,000 million dollars in the third quarter. Our initial estimates for 2009, based on the pattern of Chinese growth from a demand perspective, show contribution from investment above the 2000 average. Specifically, 60% of the drive could come from investment, compared with 50% in previous years.
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The CPI falls 0.5% in October and is heading for positive figures.
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The deflationist fears from early in the year have also faded thanks to the reactivating economy. The CPI fell in October by 0.5% year-on-year compared with 0.8% in September and much less than the fall of 1.8% in July. A large part of the slowdown in falling prices can be explained by the rise in commodity prices. The rise in housing prices being passed on to the CPI should push inflation into positive figures by the end of the year.
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So all indicators place China on the road to strong growth. Whether this lasts will largely depend on the capacity of domestic demand to take over as the driving force. To date, investment is still key, but it seems that initial steps are being taken in the right direction.
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