Sunday, November 16, 2003
China overheating?
This is a question a lot of economists and analysts would love to find the answer to. Not easy given the notorious unreliability of data from China. The Eonomist takes a stab, nevertheless. But first, it advocates the use of PPP to measure GDP more accurately.
According to a widely quoted figure (in The Economist, among other places), America accounted for two-thirds of the increase in global GDP between 1995 and 2002. Yet this number is a little misleading. Because it is calculated using market exchange-rates, the rise in the dollar until 2001 inflated America's share of global growth. Now that the euro is rising, the same method implies, bizarrely, that sputtering Europe has been the main source of global growth this year. It is therefore safer to use GDP figures converted at purchasing-power parity, which are not distorted by exchange-rate swings.
Using this alternative method, the Bank Credit Analyst, a Canadian research firm, estimates that America accounted for only 20% of global growth in 1995-2002, while China's share was 25% (see chart 1). The rest of emerging Asia contributed another 18%. China is now a powerful engine of the world economy alongside America. Since 1995 its imports have grown twice as fast as America's. In the past 12 months they have risen by 40%, compared with America's mere 2%.
The Economist agrees with Stephen Roach's and Andy Xie's take that government intervention in the form of credit tightening is inevitable, in an attempt to cool the economy down.
Admittedly, it is not going about this in the most direct way, by revaluing the yuan. The fixed exchange rate and strong capital inflows have caused foreign-exchange reserves and hence the money supply to swell. The broad money supply grew by 21% in the year to October. The central bank has tried to soak up the excess liquidity by selling bonds, but this “sterilisation” has its limits. More helpfully, the central bank tightened regulations on lending to property developers in June and increased banks' reserve-requirement ratio in September.
A second reason not to panic yet is that there are few of the signs of overheating usual at a cyclical peak. China's current-account surplus suggests that domestic demand is not overstretched; inflation, although at a six-year high, is only 1.8%; and though property prices are bubbling in some cities, average house prices have risen by only 4% in the past year.
A third reason for hoping that China's boom is not about to go bust is that official figures probably overstate investment. Jim Walker, an economist at CLSA, a Hong Kong broker, points out that China's statistics are notoriously dodgy, and that the investment data are among the least reliable. According to official figures, investment was 40% of GDP in 2002. Adding in this year's investment growth may have lifted it to 47% of GDP.
Bottom line seems to be that given the current account surplus and high savings rates, the Chinese economy is probably good to go for a while longer.
According to a widely quoted figure (in The Economist, among other places), America accounted for two-thirds of the increase in global GDP between 1995 and 2002. Yet this number is a little misleading. Because it is calculated using market exchange-rates, the rise in the dollar until 2001 inflated America's share of global growth. Now that the euro is rising, the same method implies, bizarrely, that sputtering Europe has been the main source of global growth this year. It is therefore safer to use GDP figures converted at purchasing-power parity, which are not distorted by exchange-rate swings.
Using this alternative method, the Bank Credit Analyst, a Canadian research firm, estimates that America accounted for only 20% of global growth in 1995-2002, while China's share was 25% (see chart 1). The rest of emerging Asia contributed another 18%. China is now a powerful engine of the world economy alongside America. Since 1995 its imports have grown twice as fast as America's. In the past 12 months they have risen by 40%, compared with America's mere 2%.
The Economist agrees with Stephen Roach's and Andy Xie's take that government intervention in the form of credit tightening is inevitable, in an attempt to cool the economy down.
Admittedly, it is not going about this in the most direct way, by revaluing the yuan. The fixed exchange rate and strong capital inflows have caused foreign-exchange reserves and hence the money supply to swell. The broad money supply grew by 21% in the year to October. The central bank has tried to soak up the excess liquidity by selling bonds, but this “sterilisation” has its limits. More helpfully, the central bank tightened regulations on lending to property developers in June and increased banks' reserve-requirement ratio in September.
A second reason not to panic yet is that there are few of the signs of overheating usual at a cyclical peak. China's current-account surplus suggests that domestic demand is not overstretched; inflation, although at a six-year high, is only 1.8%; and though property prices are bubbling in some cities, average house prices have risen by only 4% in the past year.
A third reason for hoping that China's boom is not about to go bust is that official figures probably overstate investment. Jim Walker, an economist at CLSA, a Hong Kong broker, points out that China's statistics are notoriously dodgy, and that the investment data are among the least reliable. According to official figures, investment was 40% of GDP in 2002. Adding in this year's investment growth may have lifted it to 47% of GDP.
Bottom line seems to be that given the current account surplus and high savings rates, the Chinese economy is probably good to go for a while longer.
