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Credit Suisse Maintains: China Is Slowing

International | Oct 04 2007

By Rudi Filapek-Vandyck

Investors and economists remain deeply divided over the question whether Chinese economic growth is due for a (mild) slow down, or not.

Economists at CLSA reported earlier this week their monthly survey of Chinese purchasing managers indicated economic growth had likely accelerated again in September. However, China experts at Credit Suisse remain firm in their conviction that this conclusion will be proven untrue.

This despite the fact that a second survey of purchasing managers in China, conducted by the Chinese National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing, also showed an uptick in activity for September.

Credit Suisse analysts and economists remain undeterred: the Chinese economy is slowing and a rise in the September Purchasing Managers Index (PMI) merely proves that this slow down will be a soft one. Credit Suisse expects growth to remain above 10% for the foreseeable future. GDP growth in China was reported at 11.9% for the second quarter of 2007.

The experts have gone through the latest PMI data released by NBS and the China Federation of Logistics and Purchasing with a fine comb and drawn some interesting conclusions.

The standout conclusion in Credit Suisse’s analysis of the latest PMI data is that global demand for Chinese exports appears to be falling quicker than what market consensus has currently penciled in. Credit Suisse has found the PMI new export orders index tends to correlate well with US retail sales data, and it is the experts’ view that the September data appear “to be pointing to a sharper correction in global demand”.

The index for export new orders remained stable in September, after a drop in July due to the lowering of the VAT tax rebate, but the experts point out the index remains far off from its heights back in March and April. The experts state it is their observation that Chinese export executives have a good insight on future demand for Chinese products through their order books.

Credit Suisse also believes most of the PMI’s recovery in September can be explained through a one-off surge in the transportation and tobacco sectors. This would be consistent with their call that underlying economic activity in China is slowing and not accelerating.

The experts anticipate China’s GDP growth to fall toward 10.5%-11% in the second half of 2007. This will make the country’s growth more sustainable, the experts believe, and also reduce the need for any aggressive tightening by the authorities.

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