China Economic Liftoff?

[aa3]

China's Q2 numbers were pretty stunning. 7.1% gdp growth in the first half, Q2 industrial production up 10% yoy in June, H1 retail sales up 15% yoy.

And cpi running at negative 1.7%, with the PPI down a huge 7.8%!

Dazedandconfused and I commented on threads that the Chinese could probably stimulus spend to get twice the gdp growth and still not have inflation.

All this is wrecking the argument by many economists that China had a weak economy that would go down when its big consumers in the US and Europe stopped buying so much. That the effect on the Chinese economy would be greater than the downturn in the US and Europe. Decoupling was laughed at as a disproven theory.

But it seems China is redirecting its economic production to internal development far faster than anyone expected. The growth potential of the Chinese economy appears even larger than it was in the boom years. It seems to me they will comfortably grow at 9% this year.. and in 2010 grow at well over 10%.

[yellerkat]

Which will reduce their need to buy foreign bonds.

Which, in turn, will be excellent for the long term world economy but will induce a load of pain for debtor economies in the short term.

[interestrateripoff]

Your forgetting its a communist run economy.

Can you really trust the figures?

Chinese banks are ramping lending because they have been told to do so. Many bad loans will be being made. There will be a huge short term gain in the GDP, but like the western economy eventually these loans will undermine the economy.

China's long term position is not good it has a huge population and 8% YoY growth is unsustainable.

[aa3]

Your forgetting its a communist run economy.

Can you really trust the figures?

Chinese banks are ramping lending because they have been told to do so. Many bad loans will be being made. There will be a huge short term gain in the GDP, but like the western economy eventually these loans will undermine the economy.

China's long term position is not good it has a huge population and 8% YoY growth is unsustainable.

One thing about their loans is a lot seem to be towards real construction. Of industrial projects, railways, power plants, even real estate. I'm not sure how much is like just bidding higher on the same house and making a larger loan because of it.

On growth I'm starting to think they can go beyond 8%, as they are already at 7.1% in H1, with few signs overheating, actually with negative 1.7% inflation.

[VacantPossession]

Even if those "stunning" figures are correct, there is a very large consideration which is not taken into account. In recent years the social consequences of forcing, or at the very least over-encouraging mass migration from rural areas into cities has now backfired, with hundreds of thousands of disillusioned workers now leaving the cities having been exploited and failing to find the quality of life they were promised, only to find that there is now even less prospect out of the cities than ever before.

Which ever way they turn a huge proportion of China's work force have been left out of what the rest of the world sees as a miracle economy. Many small towns and rural areas that exist to provide some work have been in many cases polluted beyond the pale and now offer a smog laiden, asthma enducing life due to the vast and unchecked growth in heavy industry which has ruined the landscape and literally choked the population into a dismal existence.

For every mobile phone wielding, levi wearing cheerful chinese young person you see on the newsreels there are a few hundred others that have been left out of the miraculous growth. The future impact of this is uncertain, but, stunning though those growth figures might appear, they are seriously offset by growing social and political unrest which is the inevitable consequence of unchecked expansion.

Edited July 18, 2009 by VacantPossession

[mdman]

Houston we have a problem (from Market Ticker)

The media is almost-entirely ignoring this little piece of nasty news:

July 17 (Bloomberg) -- China’s finance ministry failed to meet its debt-sale target for a third time in two weeks at a 182- day bill sale, according to traders at Galaxy Securities Co. and China Citic Bank in Beijing. The ministry had tried to sell 20 billion yuan of bills and only sold 18.51 billion yuan, traders said. The average yield for the bills sold was 1.6011 percent, they said.

Here's the problem - The Chinese, if unable to fund their operating expenses with debt sales, will be forced to sell something - like US Treasuries - to do so.

These failed auctions have also come with fairly significant "tails", or increased interest coupon demands from the buyers. This in turn is a clear statement by the buyers that interest rates are too low.

Feel that squeeze yet, Mr. Chinaman? This is the push-back from the "stimulus" and "easy money" policy, and it is now showing up in China.

One way or another this winds up hurting, and if the Chinese start to sidle toward the door with their Treasuries, it could hurt over here in the United States hard and fast.

[okaycuckoo]

Plenty of good bloggers are making the point that China's fuel consumption is reducing, suggesting a slow down in production and economic activity in general.

Maybe consumption is more than taking up the slack? I wouldn't bet on it, but I guess the OP has put down his money already.

[aa3]

Even if those "stunning" figures are correct, there is a very large consideration which is not taken into account. In recent years the social consequences of forcing, or at the very least over-encouraging mass migration from rural areas into cities has now backfired, with hundreds of thousands of disillusioned workers now leaving the cities having been exploited and failing to find the quality of life they were promised, only to find that there is now even less prospect out of the cities than ever before.

Which ever way they turn a huge proportion of China's work force have been left out of what the rest of the world sees as a miracle economy. Many small towns and rural areas that exist to provide some work have been in many cases polluted beyond the pale and now offer a smog laiden, asthma enducing life due to the vast and unchecked growth in heavy industry which has ruined the landscape and literally choked the population into a dismal existence.

For every mobile phone wielding, levi wearing cheerful chinese young person you see on the newsreels there are a few hundred others that have been left out of the miraculous growth. The future impact of this is uncertain, but, stunning though those growth figures might appear, they are seriously offset by growing social and political unrest which is the inevitable consequence of unchecked expansion.

To me the only way to fight pollution is massive amounts of money and engineering. For example Chinese cities often have some big coal plants right in town without good filters, diesel generators all over the place, two-stroke motorcycles and scooters which pollute horrifically, then coal brickettes people are burning in their homes with no filters at all for heat, oh ya and more coal burned for heat in industrial processes.

[Fromage Frais]

my friend working in Bejing tells me all the flats are empty and of a simillar price to london.

Apparently Chinease like to buy them and just leave them as a used apartment is dramatically reduced in value.

They are doing a UK just in a shorter time frame and it will have the same result if they are not careful

[IMHAL]

China's Q2 numbers were pretty stunning. 7.1% gdp growth in the first half, Q2 industrial production up 10% yoy in June, H1 retail sales up 15% yoy.

And cpi running at negative 1.7%, with the PPI down a huge 7.8%!

Dazedandconfused and I commented on threads that the Chinese could probably stimulus spend to get twice the gdp growth and still not have inflation.

All this is wrecking the argument by many economists that China had a weak economy that would go down when its big consumers in the US and Europe stopped buying so much. That the effect on the Chinese economy would be greater than the downturn in the US and Europe. Decoupling was laughed at as a disproven theory.

But it seems China is redirecting its economic production to internal development far faster than anyone expected. The growth potential of the Chinese economy appears even larger than it was in the boom years. It seems to me they will comfortably grow at 9% this year.. and in 2010 grow at well over 10%.

Amazing! To get such excellent growth and still they feel the need to provide a stimulus - they are learning fast.

[CokeSnortingTory]

And cpi running at negative 1.7%, with the PPI down a huge 7.8%!

You are suggesting that chronic deflation in China is a healthy indicator?

[Executive Sadman]

I think i recall reading on another forum that for every dollar created in the 1960s, near a dollar went back into the economy to be spent. Now to have the same effect 16 dollars have to be created.

Those probably werent the actual figures, but the trend is the same.

Its amazing the effect stimulus can have when 99% of it isnt going on paying off old debts (and creating new debts in the process)

[Confounded]

I think i recall reading on another forum that for every dollar created in the 1960s, near a dollar went back into the economy to be spent. Now to have the same effect 16 dollars have to be created.

Those probably werent the actual figures, but the trend is the same.

Its amazing the effect stimulus can have when 99% of it isnt going on paying off old debts (and creating new debts in the process)

China is the last mirage of hope, expect it to be pumped as the saviour of the World economy over the next few months as hope fails in the Western economies again.

This graph relates to your points above, a very significant graph imo.

[kilroy]

China's Q2 numbers were pretty stunning. 7.1% gdp growth in the first half, Q2 industrial production up 10% yoy in June, H1 retail sales up 15% yoy.

And cpi running at negative 1.7%, with the PPI down a huge 7.8%!

Dazedandconfused and I commented on threads that the Chinese could probably stimulus spend to get twice the gdp growth and still not have inflation.

All this is wrecking the argument by many economists that China had a weak economy that would go down when its big consumers in the US and Europe stopped buying so much. That the effect on the Chinese economy would be greater than the downturn in the US and Europe. Decoupling was laughed at as a disproven theory.

But it seems China is redirecting its economic production to internal development far faster than anyone expected. The growth potential of the Chinese economy appears even larger than it was in the boom years. It seems to me they will comfortably grow at 9% this year.. and in 2010 grow at well over 10%.

bond market does not care about current deflation. China just had its third failed auction.

[interestrateripoff]

Plenty of good bloggers are making the point that China's fuel consumption is reducing, suggesting a slow down in production and economic activity in general.

Maybe consumption is more than taking up the slack? I wouldn't bet on it, but I guess the OP has put down his money already.

The old banana republic economic indicator, if you can't trust the GDP figures look at energy consumption. If fuel consumption is reducing what are the Chinese doing to manipulate the figures?

[Timm]

The old banana republic economic indicator, if you can't trust the GDP figures look at energy consumption. If fuel consumption is reducing what are the Chinese doing to manipulate the figures?

Where can one find reliable figures for this? (UKUSA also).

[interestrateripoff]

http://www.bp.com/productlanding.do?catego...ntentId=7044622

Statistical Review of World Energy 2009

By BP so could be biased.

http://earthtrends.wri.org/searchable_db/i...variable_ID=267

Energy Consumption: Total energy consumption

Select one or more of the countries and/or regions you wish to view from the lists or retrieve all data for this variable.

http://www.eia.doe.gov/oiaf/ieo/world.html

World Energy Demand and Economic Outlook

In the IEO2009 projections, total world consumption of marketed energy is projected to increase by 44 percent from 2006 to 2030. The largest projected increase in energy demand is for the non-OECD economies.

In the IEO2009 reference case, world energy consumption increases from 472 quadrillion Btu in 2006 to 552 quadrillion Btu in 2015 and 678 quadrillion Btu in 2030—a total increase of 44 percent over the projection period (Figure 10 and Table 1). Total world energy use in 2030 is about 2 percent lower than projected in the International Energy Outlook 2008 (IEO2008), largely as the result of a slower overall rate of economic growth in this year’s reference case.

The current economic downturn dampens world demand for energy in the near term, as manufacturing and consumer demand for goods and services slow. IEO2009 assumes, however, that most nations will begin to return to trend growth within the next 12 to 24 months.

OECD member countries,4 for the most part, have the world’s most established energy infrastructures. In combination, they account for the largest share of current world energy consumption. The situation is expected to change over the projection period, however, with more rapid growth in energy demand in emerging non-OECD economies. In 2006, 51 percent of world energy consumption was in the OECD economies; but in 2030 their share falls to 41 percent in the reference case. OECD energy use grows slowly over the projection period, averaging 0.6 percent per year, as compared with 2.3 percent per year for the emerging non-OECD economies (Figure 11).

China and India are the fastest-growing non-OECD economies, and they will be key world energy consumers in the future. Since 1990, energy consumption as a share of total world energy use has increased significantly in both countries. China and India together accounted for about 10 percent of the world’s total energy consumption in 1990, but in 2006 their combined share was 19 percent. Strong economic growth in both countries continues over the projection period, with their combined energy use increasing nearly twofold and making up 28 percent of world energy consumption in 2030 in the reference case. In contrast, the U.S. share of total world energy consumption falls from 21 percent in 2006 to about 17 percent in 2030 (Figure 12).

Non-OECD Asia shows the most robust growth of all the non-OECD regions, with energy use rising by 104 percent from 2006 to 2030 (Figure 13). Energy consumption in other non-OECD regions also grows strongly over the projection period, with projected increases of around 60 percent for the Middle East and for Central and South America and 50 percent for Africa. A smaller increase, about 25 percent, is expected for non-OECD Europe and Eurasia (including Russia and the other former Soviet Republics), as declining population and substantial gains in energy efficiency result from the replacement of inefficient Soviet-era capital equipment.

[Executive Sadman]

China is the last mirage of hope, expect it to be pumped as the saviour of the World economy over the next few months as hope fails in the Western economies again.

This graph relates to your points above, a very significant graph imo.

Thanks, thats what i was on about.

can we assume it will be some time around 2014 that now the govt has taken over from the private sector in ensuring money supply continues to grow at 10-20% a year they really will be out of ideas?!

[Confounded]

Thanks, thats what i was on about.

can we assume it will be some time around 2014 that now the govt has taken over from the private sector in ensuring money supply continues to grow at 10-20% a year they really will be out of ideas?!

It would be good to see an update of this graph, I have a feeling the recent crisis has meant we have already reached zero hour.

[aa3]

Houston we have a problem (from Market Ticker) Bond market fail in China

It is interesting info.. my thought is who would get a 1.6% bond in China, when there are so many other good investment opportunities? So I agree the interest rates will have to rise.

Or the Chinese could do QE and keep the bonds low.

[aa3]

Thanks, thats what i was on about.

can we assume it will be some time around 2014 that now the govt has taken over from the private sector in ensuring money supply continues to grow at 10-20% a year they really will be out of ideas?!

I agree that seems to be the zero hour for the USA. Its an incredibly important graph and statistic.

It takes wrapping your head around but its even possible new debt could cause the economy to shrink. So 1 dollar of new debt causes 10 cents of gdp shrink.

I'm really looking forward to see an update on that graph and where it is now.

[aa3]

The old banana republic economic indicator, if you can't trust the GDP figures look at energy consumption. If fuel consumption is reducing what are the Chinese doing to manipulate the figures?

Ordinarily I agree, electrical consumption, fuel are good indicators. Also one I heard is looking at heavy truck sales.

But its possible the Chinese fuel consumption is actually falling from technical advance. They were burning something like 1.5 million barrels a day of oil to power electric generators. It was industrial enterprises because the electric grid was not stable, and they couldn't afford to be down hours each day.

But the Chinese have done such epic investment in their power grid during the last 5 years that now the grid is stable in most of the country.

There is also other factors like Chinese rail use versus the heavy trucks to move stuff around. They've been doing huge rail investment as well.

Still I think it is a good indicator to watch.

[aa3]

For US in the 1930's, read China in the 2000's.

Massive over production, over capacity.

Real threat of a huge deflationary episode (they already had a small one in the 90's).

Their government is trying to stimulate the economy with a gigantic fiscal stimulus but also more importantly, a massive, massive private credit expansion. Will this lead to even more capacity?Will this be mis-directed as malinvestment. We'll see eh.

Totally agree. They have to get their people consuming more of this great production. But its easier said than done to increase their peoples wages. As the country is so competitive, there seems always people willing to work for lower wages... and if deflation starts going it starts a death spiral where firms cut back wages and jobs.. resulting in even less consumption. The Chinese leadership seems aware of this problem though.

The talk earlier int he year was that the Chinese are trying to get free health care to their people, so that people aren't saving 50% of their income just in case of health problems that might come.