China: Good Numbers or Bad?

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 |  Includes: FXI, PGJ
by: Michael Pettis

I can only submit a very short entry this time to discuss the raft of numbers that came out Thursday morning. Regular readers will suspect that once again I am going to suggest that the numbers gave grist for everyone’s mill – optimists will see their hopes confirmed and pessimists will see their worries confirmed.

Yes, but this time around I think the pessimists clearly have the edge. On one hand optimists who are confident that the massive fiscal and credit stimulus was the appropriate response to the global crisis will note that growth in the fourth quarter was more than robust. According to an article in today’s Bloomberg:

China’s growth accelerated to the fastest pace since 2007 in the fourth quarter, capping Premier Wen Jiabao’s success in shielding the nation from the global recession and adding pressure to rein in a surge in credit. Gross domestic product rose 10.7 percent from a year before, more than the median forecast of 10.5 percent in a Bloomberg News survey, a statistics bureau report showed in Beijing today.

Days before the data were released rumors had been circulating that GDP growth would be high. The People’s Daily today had, for example, a very different interpretation of what expectations were than did Bloomberg:

China easily beat its 2009 growth target after a blistering fourth quarter performance that set the stage for further monetary tightening measures to come out in the upcoming days.

…Gross domestic product surged 10.7 percent between October and December, compared with a year earlier, a tad below market forecasts of 10.9 percent, but up sharply from a revised 9.1 percent in the third quarter.

On the other hand pessimists, of course, were very unhappy with the quality of growth. Here is what Bloomberg went on to say:

Sales quickened in December on a year-earlier basis, climbing 17.5 percent, while industrial production increased at a slower pace of 18.5 percent, today’s report showed. Urban fixed-asset investment jumped 30.5 percent in 2009, the statistics bureau said.

The surge in industrial production and fixed-asset investment highlights the fact that this growth is still wholly investment-driven, and no one has a clue as to what will happen when the government pulls back, perhaps because of concerns about rising debt. Worse, the inflation number came in higher than expected. Wednesday morning, while I was in Hong Kong, I was told by a very credible source that December CPI was going to come in at 1.9%, relative to expectations of 1.4% to 1.5%. People’s Daily again:

The statistics bureau, which released the GDP figures, also reported that consumer prices rose 1.9 percent in the year to December, a marked acceleration from November’s reading of 0.6 percent. Alarmed by a new burst of credit at the start of January, the central bank last week increased the proportion of deposits that banks must hold in reserve, rather than lending out, and followed through this week by recommending some of them to sharply curtail lending for the rest of the month.

The central bank has also been raising yields on its 3-month, 6-month, and 1-year-long bills over the past few weeks and on Thursday nudged up the yield on three-month bills for the second time this year.

Given the worrying stories about RMB 1 trillion credit growth in the first three weeks of January, and rumors (subsequently denied) that the CBRC told banks to stop lending for the rest of January, the jump in inflation will give the PBoC the ammunition it needs to press its case on monetary tightening. It has had a tough time making its case in the past, but inflation is something that worries everyone.

I guess I have been a little more aggressive than others in suggesting that we would see a move on the currency and interest rate tightening in the first quarter. Most analysts still believe that these will be second quarter events, but are increasingly warning that they could happen in the first quarter. Let’s see what happens in January, although as usual January and February numbers are always distorted by the Spring Festival celebration, which date varies from year to year according to the lunar calendar (it will be February 14 this year).

As an aside, and as an indication as to how tough the fight over trade is going to get, one of my students sent me the following note yesterday. It is about a recent Stephen Roach article in which he criticized analysts in the US who argue that the undervalued RMB has had an adverse impact on US employment (sorry but I lost the article):

Xinhua News Agency announced another notice in its internal network saying its “leading organization” instructed it to publish an important article and required all media to adopt the article in full. The article quotes Stephen Roach, head of Morgan Stanley Asia, as saying the US’s blaming China for the imbalance problem is hypocritical. The implication derived from this notice is that China won’t appreciate RMB in the near future.

Hardliners on each side are preparing for a fight. The key is to insist that the other side is wholly to blame.