Friday, November 28, 2008

Yuan Watch : Communist Spin Cycle

Citizen Sester provides The December 2008 quarterly update by the World Bank.

Please visit his site per link to the right.

The World Bank report states that much of the Chinese slowdown (so far) has come from weaker domestic demand mostly in real estate and construction. The real estate sector has suffered a 'particulary pronounced' slowdown as a result of policy tightening in 2008. Weakness in construction has led to a sharp slowdown in heavy industries like steel and cement.

Domestic consumption has been a bright spot, even if autos and home sales growth has suffered. Incomes are up.

China-weighted global GDP growth (growth around the world weighted by importance of markets) will be weaker than the 90's Asian Crisis. Overall exports in value-added terms are 17.5% of GDP.

Government-influenced investment make up almost one-third of total investment.
Government-influenced direct spending wil contribute more than half of estimated 2009 GDP growth. This spending is expected to be front-loaded.

Despite export volume weakness, China's current account surplus is likely to increase in 2009 due to lower raw commodity prices. (estimation is 430 billion, which will buy a lot of Treausries).

The case for stimulating domestic demand is stronger than the case for stimulating exports by depreciating the exchange rate or giving tax incentives to exporters.

My comments:

China Inc. will have to spin hard to not fall into its' own liquidity trap. Industry and investment are the drivers, as the study shows, but domestic demand is what the authorites are now focusing on. However the Chinese consumer may very well see lower interest rates as meaning that they have to 'save longer' and 'save more' to make the same amount. If the ideology of 'it is patriotic to shop and support the economy', can take hold China will make the transition. The question is how quickly and in the intermediate term will it avoid a brutal hard landing.

In the short term, China will mildly appreciate the yuan against the dollar- although this will be seen as either appreciating or depreciating in other countries based on the dollars travails - a kind of virtual re-peg with a little juice to account for 'reported' GDP growth differentials and a desire not to dissuade FDI since they don't have enough money to fund announced stimulus packages if they stay within the 3% debt to GDP measurement.

Much like GE they will keep making the 'numbah' ( the numbah being whatever minimum they think it can be whilst maintaining morale) until they are stretched so far that they can't. They will try to fight the caution of the consumer with spin.

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