Assessing the future of Chinese economics
February 23rd 2008 15:28
Standing here on February 24, 2008 and look ahead to access the future of Chinese economics, I can see nothing on the chart but a southward turn arrow. China is facing two very serious economics challenge of cost – push inflation and slow - down export growth.
Data released by the National Statistic Bureau (NSB) on February 19, 2008 showed consumer price index (CPI) in January surged 7.1 % year on year. Figure released in January showed CPI surged 18.2 in December 2007. One good way to tell inflation in China is to track hog price. Pig price jumped by 90 % year on year in August 2007 due to pig pandemic.
Farmers have not been able to beef up production in the last 6-7 months pig raising cycle. Pork shortage is still prevalent today driven overall food prices up. Fowl price has choked up too as consumers turn from pork to white meat. Vegetable rose 30 % year on year at year end and fruits up by 13 %.
Since food accounts for about 80 % in Chinese CPI basket, it does distort inflation rate to a certain extend. Yet, it still reflects a good over all cost push picture. And to aggravate the plight of food cost, crude oil future soared past the US$ 100 historical mark on February 19, 2008. A day earlier, Japan Nippon Steel and South Korea Posco agreed to pay Brazil’s Vale do Rio Doce 65 % ore price hiked. Chinese steel maker will have no alternative but to follow suit.
China car production have been up by reaps and bounds in the past decade making China the world’s second largest oil consumption nation after USA. China imported 3.26 million barrels per day of crude oil in 2007 or 12.4 % higher in 2006. This year China will have to import 48 % of crude oil for domestic consumption and has yet to count the inflation pain with oil hovering around 100 dollars line.
Meanwhile, rapid construction growth has pushed China to be the world’s biggest steel consumer. Last year China consumed a total of 500 million metric tons of steel or about 40 % of world production. China’s thirst for iron ore will even be higher this year in rushing to complete many mega-project constructions for the Olympic game.
February CPI which is due to be released in March 11 is likely to be much higher than the new 11 year high of 7.1 % in January and may possibly break a hard to swallow double digits figure.
US sub-prime dilemma will not bode well to the export led Chinese economy as well. It will be her second problematic economic area behind inflation. Although the US may not be China's biggest trading partner now as it has been replaced by the European Union, it is still the lynchpin of the global economic. A US slowdown will certainly hit China' other export markets too.
The twin problem of inflation and export markets will have a knock on impact upon China’s investment growth and production cost advantages in the later part of 2008. China should be extremely prudent in handling her economics at this challenging moment.
I think the imminent task for the policy maker is to tame down inflation more than accelerate growth. Credit injection in January to achieve growth suggests that inflation is likely to have further legs on. It would keep inflation high or may cause it to sky rocket.
I, therefore, suggest a graduate downward GDP growth target from the present 11.5 % to 7-8 % in 2010. It is time to tighten monetary policy further with more reserve requirement. Fiscal wise, cool down public expenditure to tame inflation. Failure to do so, China may face an economic crash following the US sub-prime rather than a soft landing.
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