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China's engines of growth

(China Daily)
Updated: 2009-08-24 08:00

A real estate project in Guangzhou. [Xinhua]

China's July data release points to continued economic recovery in the second half of this year, led by strong government-backed investments. The surge in bank credit in the first half provided the funds needed for investment growth, but has also generated concerns about the risk of rising inflation, non-performing loans and potential asset bubbles.

Jing Ulrich, chairwoman of JP Morgan Security China, recently discussed China's July economic data with China Business Weekly.

Alleviating market concerns about the possibility of policy tightening, Chinese officials have emphasized they will maintain an active fiscal policy and moderately loose monetary policy while fine-tuning measures to guard against asset bubbles. With the global recovery unlikely to be smooth, she said domestic demand is likely to remain the primary engine of growth for the remainder of 2009.

Q: What is your perspective on consumer prices and producer prices in coming months?

A: China's Consumer Price Index (CPI) declined by 1.8 percent year-on-year in July, from a negative 1.7 percent in June. The Producer Price Index (PPI) fell by 8.2 percent year-on-ye Jing Ulrich ar in July, from a negative 7.8 percent a month earlier.

July CPI and PPI figures mark the sixth and eighth consecutive months, respectively, in deflationary territory. Despite recent deflation, prices should begin to rise later in the year with the continued recovery in the domestic and global economies.

China's recent inflation readings haven't captured the surge in asset prices, which have been an important factor behind monetary policy decisions in recent months.

Authorities want to sustain the economic recovery without triggering a round of asset price bubbles and spiraling inflation.

Jing Ulrich

Producer prices have been falling for months, but there are some signs of a price up-tick for key industrial commodities. Chinese spot steel prices have reached the highest level since last October, with prices for hot-rolled sheet up 31.9 percent since mid-April, wire-rod up 41.9 percent and steel plate up 30.2 percent.

Continuing the trend, China's major steel mills are hiking their offer prices for August and September.

The input price components of China's two manufacturing PMI series are on the rise. The CLSA-PMI input price reading jumped to 59.1 in July from 49.8 in June -- the first monthly expansion since September 2008.

The official NBS-PMI input price reading increased to 59.9 in July from 57.8 in June. Upstream raw material price increases are unlikely to filter rapidly to the retail level because of overcapacity in China's industrial sector.

Under the National Development and Reform Commission (NDRC)'s new refined products pricing mechanism, retail prices for gasoline and diesel fuel were raised 9 percent and 10 percent, respectively, on June 30 - the third successive increase since March.

In response to the pullback in global crude prices earlier in the month, retail prices for gasoline and diesel were subsequently cut by approximately 3 percent each on July 29.

Related readings:  A tale of two countries' economic growth and recovery  China's export to resume growth in Q4: institutional forecasts  GDP growth not at cost of public health  China heads for 8% growth target

In a recent report, the statistics department of the People's Bank of China projected that CPI would bottom at the end of the third quarter. Strength in domestic demand, relatively high levels of liquidity and rising global commodity prices are expected to add to inflationary pressure in coming months.

New loans rose to 1.53 trillion yuan in June, bringing aggregate new lending in 2009 to 7.37 trillion yuan, up 201 percent year-on-year from the first half of 2008.

Global commodity prices have rebounded off the 12-month lows of early March and have recovered from their recent pullback in early July.

While China's CPI should begin to rise later in the year, price inflation should be moderate, since producers and consumers alike will continue to feel the effects of industrial over-capacity and unemployment for some time to come.

Q: Will fixed asset investments continue to drive the economy as a major GDP contributor?

A: China's fixed asset investments (FAI) increased in July, with FAI growing 32.9 percent year-on-year in the first seven months of 2009, compared to 33.6 percent growth from January through June.

It comes as no surprise that fixed asset investments, fueled by the government's stimulus package, have become the most important contributor to China's GDP growth. Gross capital formation -- the definition of which includes components of FAI -- contributed 6.2 percentage points to China's 7.1 percent real GDP growth in the first half of this year, helping to offset the effect of negative net exports.

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