DEMAND driven ECONOMICS

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• China- Growth Tiger

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  Amarendra Dhiraj    Group moderator

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  China- Growth Tiger

  Well, so much for the great China stock blowout. Since the 9% sell-off in mainland Chinese stocks in early February that reverberated around global equity markets, share prices in Shanghai and Shenzhen have resumed their incredible levitation act in recent trading sessions, bounding from one record high to another.
  
  On Mar. 27 the closely-watched Shanghai and Shenzhen 300 Index, which tracks yuan-denominated A-shares traded on the two major mainland bourses, finished up 0.7% to a record 2784.02 at the close. The index is up 6.9% over the last seven trading sessions, 36% on the year and a mind-blowing 166% over the previous 52 weeks. That's the second best performance in Asia (the Ho Chi Minh stock index in Vietnam is performing fractionally better) and the fourth best worldwide in 2007.
  
  Excitable Economy
  
  The hyperactive performance of China stocks and a flurry of robust data recently released suggest the Chinese economy is again starting to show the kind of hot flashes that worry Beijing financial authorities—as well as international lending agencies such as the Asia Development Bank and the International Monetary Fund. "The surge in investment and commercial bank lending has not yet been brought under control," ADB concluded in its analysis of the Chinese economy in its Asia Development Outlook 2007 released on Mar. 27.
  
  Resisting Rate Hikes
  
  Back on Mar. 17 the People's Bank of China, the nation's central bank, raised interest rates for the third time since April, 2006. It was a modest move: the central bank increased a key benchmark, one-year interest rates, by 27 basis points to 6.39%. The one-year deposit rate was nudged up by the same amount, to 2.79%.
  
  However some economists think the PBOC will need to tighten the credit tourniquet again later this year to really cool things off, given the explosive growth of some key indicators during the first two months of 2007. In February China reported a surprising 51% year-on-year spike in exports, a nearly 18% advance in M2 (currency, demand deposits, and savings) money supply growth, and an 18.5% jump in industrial production.
  
  Jobs Needed
  
  The reason for that is twofold: the Chinese economy is hooked on exports for high-speed growth, and even at its current sizzling rate of economic expansion there is still a huge chunk of the population in need of work. External trade as percentage of gross domestic output is now about 66% vs. 42% back in 2002.
  
  China created about 11.8 million new jobs in urban areas in 2006, mainly in manufacturing, construction, and services. However the Chinese government estimates that it needs to create 25 million new jobs. "Millions of migrants from the countryside, new graduates, and laid-off workers still went without work," the ADB study on China's outlook pointed out.
  
  So even though the stock market may be booming, and China's hyper-growth wave continues to impress, the mood inside Hu's government in Beijing is probably not that ecstatic. China needs to cool things off—no one denies that. But a lot of painful policy dilemmas are standing in the way.
  
  • 27 Mar 2007, 5:29 pm
  Amarendra Dhiraj wrote: > Well, so much for the great China stock blowout. Since the 9% > sell-off in mainland Chinese stocks in early February that > reverberated around global equity markets, share prices in Shanghai > and Shenzhen have resumed their incredible levitation act in recent > trading sessions, bounding from one record high to another. > > On Mar. 27 the closely-watched Shanghai and Shenzhen 300 Index, which > tracks yuan-denominated A-shares traded on the two major mainland > bourses, finished up 0.7% to a record 2784.02 at the close. The index > is up 6.9% over the last seven trading sessions, 36% on the year and > a mind-blowing 166% over the previous 52 weeks. That's the second > best performance in Asia (the Ho Chi Minh stock index in Vietnam is > performing fractionally better) and the fourth best worldwide in 2007. > > Excitable Economy > > The hyperactive performance of China stocks and a flurry of robust > data recently released suggest the Chinese economy is again starting > to show the kind of hot flashes that worry Beijing financial > authorities—as well as international lending agencies such as the > Asia Development Bank and the International Monetary Fund. "The surge > in investment and commercial bank lending has not yet been brought > under control," ADB concluded in its analysis of the Chinese economy > in its Asia Development Outlook 2007 released on Mar. 27. > > Resisting Rate Hikes > > Back on Mar. 17 the People's Bank of China, the nation's central > bank, raised interest rates for the third time since April, 2006. It > was a modest move: the central bank increased a key benchmark, > one-year interest rates, by 27 basis points to 6.39%. The one-year > deposit rate was nudged up by the same amount, to 2.79%. > > However some economists think the PBOC will need to tighten the > credit tourniquet again later this year to really cool things off, > given the explosive growth of some key indicators during the first > two months of 2007. In February China reported a surprising 51% > year-on-year spike in exports, a nearly 18% advance in M2 (currency, > demand deposits, and savings) money supply growth, and an 18.5% jump > in industrial production. > > Jobs Needed > > The reason for that is twofold: the Chinese economy is hooked on > exports for high-speed growth, and even at its current sizzling rate > of economic expansion there is still a huge chunk of the population > in need of work. External trade as percentage of gross domestic > output is now about 66% vs. 42% back in 2002. > > China created about 11.8 million new jobs in urban areas in 2006, > mainly in manufacturing, construction, and services. However the > Chinese government estimates that it needs to create 25 million new > jobs. "Millions of migrants from the countryside, new graduates, and > laid-off workers still went without work," the ADB study on China's > outlook pointed out. > > So even though the stock market may be booming, and China's > hyper-growth wave continues to impress, the mood inside Hu's > government in Beijing is probably not that ecstatic. China needs to > cool things off—no one denies that. But a lot of painful policy > dilemmas are standing in the way.