FYI | Apr 20 2007
By Greg Peel
Dissatisfaction with the Chinese has been reaching somewhat of a fever pitch in the US Congress, as more and more bills are proposed attempting to sanction cheap Chinese exports. The US Treasury has stepped up calls for China to allow its currency to adjust more realistically to the US dollar. While the euro and pound (and Aussie and Kiwi) run wild against the greenback, China continues to maintain tight exchange bands.
This is all part of an attempt by the Chinese government to avoid a massive revaluation of the yuan in one fell swoop – a move that could threaten to crash the booming Chinese economy. Instead, officials have been taking measured steps across all areas of monetary and fiscal policy in order to slow, but not turn around, the Chinese freight train. Unfortunately these measures have proven insufficient.
Chinese officials had been hoping for a GDP growth rate of 8% in 2007. Global economists were predicting more like 10%. Yesterday the March quarter figures were released showing 11.1% growth, up from 10.4% in the previous quarter. It is clear the Chinese economy is only moving in one direction.
There was a swift reaction to the news from the Chinese stock markets, which fell 3% yesterday on fears of another interest rate rise. Other Asian markets, and Australia, also suffered falls. While 3% is large in anyone else’s terms, it has to be considered that the Chinese market has rallied nearly 30% since the 9% fall back in February.
The oil price took a tumble last night, given fears that any measures taken by China would crimp energy demand. Nymex May crude fell US$1.30 or 2% to US$61.83/bbl. This fall flowed over into the gold market, which has been struggling to breach the US$690/oz level anyway. Gold fell $7.30 or 1% in New York to US$682.40/oz.
The Bank of China has raised borrowing costs three times in the past twelve months, to 6.39%. The yuan has been allowed to appreciate 7.2% against the US dollar since the peg was lifted in 2005. To put that into perspective, Chinese GDP growth is running at 11%, its cash rate is 6.39% and its currency has revalued 7.2% since 2005. Australia’s GDP growth is around 2.5%, its cash rate is 6.25% and the currency has rallied over 11% since 2005.
Loan growth continues to run out of control in China, feeding into investment. Urban investment in factories and real estate rose 25.3% in the March quarter, up from 24.5% in all of 2006. China’s steel-making capacity of 462mt at the end of 2006 was 10% higher than production. China’s foreign reserves grew by US$45 billion per month to US$1.2 trillion in the March quarter – double the average monthly increase of the past three years.
The Chinese government continues to take a softly-softly approach to monetary policy and financial reform measures, lest it send the economy into a spiral. However, the Chinese economy looks quite capable of blowing up by itself if the government doesn’t start to get real.
