Retail sales in China for January and February shot up by 20.2% over the same period last year, above most forecasts.I think along with December’s equally rapid growth rate this is the highest growth rate yet recorded (although they have only been recording this for about ten years or so).I understand that these are nominal numbers, so part of the increase in spending simply reflects the fact that everything costs more, thanks to a year of 8-9% inflation.Still, even adjusting for inflation consumer spending is moving along healthily.
There is both good news and bad news here.The good news is that with domestic consumption growing so quickly, China is gradually rebalancing its economy away from its over-reliance on domestic investment and the export sector.This has to be healthy.The bad news is that a lot of this consumption growth may have been fueled by concerns over rising prices. If that is the case, we may already be caught up in the self-reinforcing loop I mentioned in yesterday’s blog entry, in which inflation concerns cause an acceleration of spending, which itself pushes up inflation.
Meanwhile we also got FDI figures for February, and they show a very sharp increase over February of last year. At $6.9 billion February’s FDI investments are up 38% over last February.Combined with the sizzling FDI numbers for January – $11.2 billion, or more than double the amount for January 2007 – this means that in the first two months of the year China has attracted $18.1 billion, or 75% more than the same period last year. Does this sharp increase – coming when the RMB is less cheap and tax benefits less copious – have anything to do with speculative desires to take advantage of the rising RMB? Perhaps.According to today’s Bloomberg, “The central bank is paying close attention to ‘excessive’ growth in foreign direct investment, the China Securities Journal reported this month, citing Hu Xiaolian, director of the State Administration of Foreign Exchange.”
At any rate there is a lot of speculation in the market about a further speeding up of the appreciation, which has been moving along at a rapid clip in recent days. Some people are even wondering out loud about a surprise move. Thomas Stolper, a London-based economist at Goldman Sachs said in a report March 10 that we might see a pick up in the rate of appreciation. According to him “One increasingly likely explanation could be that China's policymakers may be in the process of preparing the next leg of much faster appreciation, and maybe even another one-off revaluation.”
Money supply growth has slowed down a tad, although it is still too high, in my opinion. The PBoC said today on its website that M2 was up 17.5% from February 2007 to February 2008. Last month it grew by 18.9% and Bloomberg says the median estimate of surveyed economists was 17.8%. Loans were also up in February, by a relatively low 15.7% compared to the huge jump in January. We are getting so much volatility in the data that it is hard to get any clear sense of trends.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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January, 2008
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