Tag Archives: GDP

Chinese Excavator Sales Crash!

23 Jun

Earlier this month the Wall Street Journal carried an article headlined “China’s holes in the road”. The journal contented that a recent slump in excavator sales is a lead indicator of a hard landing in China’s GDP growth.

The headline figures are indeed stark. Year-on-year excavator sales in May were down 9.6%. What’s more, sales of heavy duty trucks declined 22.4% over the same period.

The WSJ’s conclusions are simply sloppy! These data points do not necessarily indicate (and should not cause!) a sudden and quick slowdown in GDP growth and fixed asset investment. Why?

• Sales in durable goods are naturally choppy, and a contraction in excavator sales in May comes off the back of a massive 20.8% growth in April. Heavy duty truck sales did decline in April too (-8.3%), but this also comes off the back of a strong March (10.2% growth).

• A limited period of falling sales in such goods will not have a significant impact on FAI growth, as the actual number of outstanding machines continues to grow. In addition, industry can increase utilization rates, and increase the lifespan of outstanding machinery.

• The Chinese authorities have been implementing a process of tightening. This leads corporates to allocate more of their cash to more immediate concerns like working capital.

• As for a reduction in excavator / heavy duty trucks causing a slowdown itself…well it only accounts for ~1.7% of China’s fixed asset investment, and a third of excavators are actually imported!

Looking at the economy from another angle – what is there supporting a soft landing?:

• Money supply is still supportive

• Social housing should fill the gap left by private real estate developers

• Healthy overall fiscal situation


Japan’s Quake – The Impact on China’s Economy

14 Mar

Let me start by expressing my deep sadness and sending my condolences for the disaster facing Japan.

Since 2007 China has been Japan’s largest trading partner. As such there is likely to be some level of economic impact. About 8% of China’s exports end up in Japan (China’s third largest export market), and about 12% of China’s imports come from Japan (China’s largest source of imports).  In addition, about 7% of China’s FDI comes from Japan. Let’s look at each of these issues (exports and imports) in more detail.


The pertinent question is whether the disaster will have a negative impact on Chinese exports to Japan. If history is anything to go by, Chinese exports might in fact increase. After the Kobe earthquake in January 1995 China’s exports to Japan increased by 65% yoy in 1Q95 (from 39% yoy in 4Q09). Exports increased to substitute for the loss of Japan’s production, and included goods such as metals, construction materials and prepared food.

Although the worst hit Japanese areas are not as industrially intensive as those hit in the 1995 earthquake, rolling power outages across the country to account for loss of electricity production (due to the nuclear power plant explosion) will have an impact on industrial production across the board.


The same question can be asked of imports. Will China’s imports from Japan suffer as a consequence of the current disaster? Logically, I would assume they will in the short-term. In 1995 China’s imports of Japanese vehicles, for example, crashed 77% yoy in 1H95 from an increase of 14% yoy the previous half.

As I mentioned, the current quake/tsunami devastated areas are less industrialized than those hit in 1995. This might mean that the impact on imports could be smaller this time, nonetheless the impact on the Chinese economy might be bigger this time around. Why?  China has become an assembly line for some major Japanese multinational companies in the past decade, accounting for the downstream production for many multi-national firms. As such, output disruption in the Japanese upstream (e.g. chips) presents a potential risk for Chinese production. Toshiba, for example, has NAND facilities in the damaged areas; they provide chips to the likes of Apple. However, while the impact could be felt for a number of quarters while plants are repaired / rebuilt, I believe the impact will be muted, as Chinese producers seek substitutes from other sources such as Korea and Taiwan.

A Question

Over the past few days grain prices have come down from recent highs. One driver is Japan. I would have thought that damage to Japanese inventory in the ports would have provided upside to grain prices. However, I’ve heard others argue that port disruption is causing concern that US exporters will be left with inventory, and as such prices of grains have softened. Clearly my initial thinking was incorrect as prices have gone down in the short-term, but does the argument for Japan impacting prices negative make sense? Let me know what you think.

Zai Jian

Is China’s Growth Slowing to 7%?

28 Feb

Yesterday Chinese Premier Wen Jiabao went online to answer questions posed to him by the public.

He stressed a number of themes in his answers:

  • Firstly, and perhaps of concern for some readers, he set China’s growth projection for the period of its 12th 5-year plan (2011-2015) at 7%. We will come back to this point shortly.
  • Interesting for the current climate in the Middle-East, he stressed that he understands that the combination of inflation and corruption leads to social unrest. He specifically mentioned that institutional reform is the long-term answer, and acknowledged that the cause of much unrest is the concentration and unchecked nature of power. Interesting.
  • The Premier stressed that the stabilization of consumer prices were top on his list of priorities. He also mentioned that he expects household income growth to equal GDP growth, and wage growth to match labor productivity. In addition, he mentioned plans to raise wages for low earners, limit the top end of wages, protect legal incomes, and curb illegal incomes.
  • He promised to bring the property market under control. One thing he stressed was the supply side of the problem. The Government plans to build 36 million social housing units over the coming 5 years, of which 10 million will be started in 2011 alone. I’ve written about my skepticism of the curbing real estate in previous blog entries.
  • Personal income tax thresholds are to increase.
  • Premier Wen said he will enact currency exchange reform, and plans to move towards a more flexible managed floating rate against a basket of currencies.

So he appeared to say the right things. His message was balanced and socially aware. But what about this 7% projection? Are we to believe that the heyday growth is behind us?! Is this a sign of impending tightening measures? The short answer is no, and here’s why:

  • Firstly, the projection associated with the previous 5-year plan was… take a guess…7.5%! Over the previous 5 years growth was actually 11.1%. So the downward revision of 0.5% is actually small, and should be put in context.
  • Secondly, this is a projection, not a target, which makes it non-binding. Beijing does not make targets!
  • Beijing historically sets low projections to avoid disappointment.
  • Beijing often sets low projections as a minimum to reduce both excessive competition on the local level, and to minimize data manipulation.
  • In addition, we should not be shocked by this. Although 7% had never been announced as an official projection, the figure had been previously leaked in conjunction with the 12th 5-year plan.

Obviously the authorities are aware that the potential growth rate will gradually decline. Not only is the base for comparison getting tougher, but there are labor, resource and environment constraints too. So while I do believe growth over the coming 5 years will be above 7%, I have no doubt it will be below 11.1%. Perhaps 8.5% to 9.5% is a more reasonable expectation.

The redistribution of wealth – housing policy, demographics, and labor shortages (Part 2)

31 May

(For Part 1 – see the blog entry below this one, or go to the following link: https://ravendragon.wordpress.com/2010/05/30/the-redistribution-of-wealth/)

With people hungry for manufacturing work, there was no incentive for the Government to create low-cost public housing.  However, over the past few years, not only has the demographic balance begun to create a labor shortage, but the prices of coastal real estate have rocketed.  The result is to push workers into worsening living conditions, often provided by the company itself.

In addition there is now competition to the well-known coastal areas: inland based industry is on the rise, in places like Chongqing.  (By the way, on the subject on Chongqing I highly recommend Peter Hessler’s book River Town: http://www.amazon.co.uk/River-Town-Two-Years-Yangtze/dp/0719564808/ref=sr_1_1?ie=UTF8&s=books&qid=1275294276&sr=1-1)

These three dynamics (labor shortage, bad living conditions / increasing coastal property prices, and inland competition for labor) looks set to lead to an increasing trend in local governments establishing public housing.

As well as making economic sense (i.e. attract workers and all that goes with them and industry), there are political incentives too to establishing public housing.  With major shifts in Government (local and national), party officials keen to progress their careers (and even move to Beijing) will be keen to show their ability to build industry, and keep the peace – after all, peace and prosperity are the unspoken quid pro quo for the one party state.

Building public housing is also likely to buoy GDP, help employment, and prevent downward pressures on the prices of raw materials.

It looks like the coming together of demographics; political ambition and economic good might also help in the farer distribution of growth, and improve the lot of the Chinese migrant worker.  It’s a win-win situation for everyone. Power to the people!

Back to double digit growth

21 Jan

There’s been a lot of buzz in the media this morning about China’s announcement that GDP grew 10.7% year-on-year in the 4th quarter of 2009.  2009 GDP expanded 8.7% as a whole, which was higher than market forecasts of 8.4%-8.5% (though I note than the figures published for the first half of the year were slightly upgraded).

I would imagine 2010 is going to be strong, and might actually reach 10%, helped by a surge in exports, which could increase by as much as 35% in the second quarter of this year.

Infaltion in December jupmed 1.9% (against market expectations of 1.4%).  This was primarily due to food prices.  I can see the CPI increasing above the 2.25% deposite benchmark rate some time in the first quarter of 2010, which I would expect to result in an interest rate hike sooner rather than later.

Governmment sponsered spending on rail and highway projects slowed towards the end of 2009.  In conjunction with the macro tightening policies enacted last week (raising banks reserve ratio requirements) this is negative news for the raw material and construction segments.

People are asking what this means for the world economy.  Essentially growth can only be good.  On the back of this good news I would expect wall street to rally today, and perhaps for the dollar to continue strengthening (after its little fall last week) – though that could be affected by payroll data due out today.

Goldman Sach: 09e GDP +9.4%

10 Aug

Goldman Sachs have increased their 2009e Chinese growth forecast to 9.4% (from 8.3%).  The bank expects the economy to grow 11.9% in 2010e.

“China is closer to the point at which it should be equally worried about tightening too late as it is about tightening too early”

Electricity consumption vs GDP growth

9 Aug

If one adds the economic output data for China’s 31 provinces in 1H09, they do not equal the national figures published by Beijing’s National Bureau of Statistics.  In fact the sum of the parts is 10% larger than the whole! (Einstein eat your heart out!), with 24 provinces announcing growth rates higher than the national average. This is an improvement on 2008 figures in which 30 provinces claimed greater than average growth.

Chinese macro economic figures have the following difficulties (especially when comparing to other countries’ figures):

1. Retail sales figures are measured at the wholesale level, and often incorporate government and corporate purchases.

2. Fixed investment data (the largest component of China’s GDP) are accounted for when the money is distributed, as opposed to spent.

3. Economic activity is measured in China in terms of how much is produced, as opposed to how much is consumed.

Economist suggest that there are other metrics by which one can judge economic growth, one such metric being electricity consumption.  The graph below shows that changes in electricity consumption in China are not highly correlated by with changes in overall output.  Granted there are other factors involved in both, but I would expect one to be indicative of the other.  From now on I suggest keeping my eyes on this electricity data as a good lead indicator of the Chinese economy, a good way to compare trends with other countries, and breaking it down to which sectors are most effecting the changes in consumption.