Thursday, 21 July 2005

China's GDP rises 9.5 percent

China's red-hot economy is not getting cooler despite the government's efforts.

China's GDP grows 9.5 percent in first half year
China's gross domestic product (GDP) for the first half of this year reached 6,742.2 billion yuan (812.3 billion US dollars), a year-on-year increase of 9.5 percent. "It was 0.2 percentage points lower than the growth rate for the same period of last year," said Zheng Jingping, spokesman of the National Bureau of Statistics, at a press conference on Wednesday...

China's fixed assets investment reached 3289.5 billion yuan in the first six months of this year, a year-on-year increase of 25.4 percent. China's industrial production grew by 16.4 percent in the first six months of this year on a year-on-year basis, says a report released by the National Bureau of Statistics...

Meanwhile, Chinese companies' efforts at acquiring US companies seem to be floundering. Appliance manufacturer Haier America and two investment partners have dropped their bid to buy US appliance maker Maytag, while US oil producer Unocal Corp has endorsed the latest US$17 billion takeover offer from Chevron Corp, favouring it over CNOOC's financially-superior but politically-problematic offer.

China needs to think again about whether it wants to continue accumulating US dollars if the only assets it can buy with them are US fixed income instruments.

On the other hand, maybe China will not continue to accumulate US dollars at the current rate. Barry Ritholtz points to a John Mauldin post that points to some research from GaveKal Research Limited covering the renminbi revaluation and the US dollar carry trade.

[W]e are very confused by the recent protectionist rhetoric coming out of Washington DC. Indeed, the efforts to push China to revalue appear to us to be both clumsy, and dangerous.

It is dangerous because it is playing into the hands of the protectionist lobbies all over the world. It is clumsy for a revaluation, even a large one, would have no impact on the US current account deficit. Why? Because given the state of excess capacity in China in almost all industries, the costs of a RMB revaluation would simply be passed on to the margin of Chinese companies...and not unto the US consumer...

We will turn that question around and ask you to put yourself in the shoes of a Chinese policy maker. This is the situation you are facing today: a) you have the world's worst performing stock market which is hitting 8 year lows), b) you have the world's best performing bond market (Chinese 10 years have moved from 5.25% to 3.7% in the past ten weeks), c) you have industrial production rolling over (weak oil consumption, weak iron ore imports, weak Baltic, weak steel prices, weaker industrial production numbers...), d) you have real estate activity rolling over... e) inflation has fallen from +5.3% to 1.8% in ten months, f) M1 growth has fallen from +20% to +10% in the past year... In other words, nothing in China's economic data, or market performance points to the need for a RMB revaluation.

It does seem to me that the idea that it is not -- or no longer -- in China's interests to revalue is becoming an increasingly held one. GaveKal warns of the consequences when more people take to this idea:

[T]he excess US$ that have showed up in [Asian] central bank reserves represent borrowed US$; not earned US$... With an economic slowdown unfolding in China, a revaluation becoming increasingly unlikely, a rising US$, rising US interest rates, and Chinese companies lining up to get money out of China...some will sell...their RMB... [T]he Chinese money supply will shrink... We believe the unwinding of the US$ carry trade will affect Asia disproportionately; especially countries with pegged currencies (HK, Malaysia, China) which will be unable to cope with the unwinding of the US carry-trade by allowing their currencies to weaken...

GaveKal also thinks that if the US$ carry trade unwinds as US interest rates rise, it would leave the euro vulnerable as the euro zone's interest rates "can only go down".

Morgan Stanley also has recent commentary on China that arrives at somewhat similar conclusions with those of GaveKal's.

Consistent with strong indicators of the past few months, China reported faster top-line real GDP growth in 2Q05... [I]t is unambiguous to us that investment-driven growth in China has maintained a strong bias... [I]n the absence of sufficient tightening, growth may accelerate this year before slowing...

[W]e believe that the investment-driven cycle will come under the pressure of its own weight - overcapacity, unfavorable pricing, reduced cash flow and shrinking margins... Deteriorating profitability and corporate cash flow are set to force a slowdown in capex, bringing down the unsustainably strong economic growth.

Amid runaway growth and persistently excessive investment, we see a change to the renminbi exchange rate regime less imminent. Investment excesses are raising our concerns over financial system health once again. We believe the fixed exchange rate should serve as a crucial anchor of stability for the time being.

There are changes coming to China's economic scene, and despite most people's expectations and the latest GDP figures, it may not be to the exchange rate.

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