China’s shift to domestic demand as exports slowing

We already noted this policy change before, retail sales are on fire in China, growing at 20%. And guess what eFuture’s strength is.. supply chain management for the retail sector. The biggest imperative China has is to maintain social stability, hence they must create jobs and keep the spectacular growth continuing at virtually all cost..

China Plans $58 Billion Stimulus Package and Rate Cuts as Policy Shifts from Inflation to Growth

  • China’s policymakers are considering a $58 billion (400 billion yuan) economic stimulus package, and will ease monetary policy later this year, as focus shifts from taming inflation to promoting economic growth, said Frank Gong, chief China economist at JP Morgan Chase & Co (JPM).
  • The stimulus package would be equivalent to 1%-1.5% of the nation’s gross domestic product (GDP) and aimed at smaller businesses struggling with high material and energy costs, a strong yuan, narrowing export demand, and the government’s credit tightening.
  • “The top leadership is carefully considering an economic stimulus package,” Gong wrote in a note to clients. “This will include tax cuts and measures to ‘stabilize domestic capital markets‘ and support ‘healthy development of the housing market’.”
  • Gong, who in 2005 correctly predicted that China would end its currency peg to the dollar, also said the central bank will ease monetary policy “later in the year” as inflationary pressures subside and exports slow in the face of a global economic downturn.
  • The People’s Bank of China has kept interest rates unchanged this year after six increases in 2007 in an effort to undercut inflation and keep the economy from overheating. Of course balancing inflation and growth are proving tricky for China.
  • While consumer prices, which hit a 12-year high of 8.7% in February, receded to 6.3% in July, producer prices jumped 10% from a year earlier – an indication that corporate profit margins are caught in a vice.
  • There is now a growing concern that corporate profit growth will hit a virtual standstill in 2009, causing an economy that has experienced double-digit growth for five straight years to finally fall back down from orbit and into single-digit territory.
  • Those fears were exacerbated by Lehman Brothers Holdings Inc. (LEH) recent prediction that China’s GDP growth would fall to 9.5% in 2008 and 8% percent in 2009.
  • China’s economy grew at 10.1% in the second quarter, still the fastest rate of growth among the world’s 20 largest economies, but a slight decline from last year’s 11.9% annual expansion.
  • The benchmark Shanghai stock index is also on the way down, having plunged 56% since the start of the year.
  • “China’s economy is suffering from unstable global factors, increasing challenges and hardships,” Xav Feng, China head of research at Lipper Inc., told China Daily.
  • China’s top priorities for macroeconomic control in the second half are maintaining stable but rapid economic growth and controlling inflation. This is proof that the government has become more cautious on macroeconomic controls, and monetary policy won’t be so tight in the future,” he added.
  • This sentiment was corroborated by China’s second quarter monetary report, released Friday, which dropped any reference to monetary policy as “tight.” In the previous report, released in May, China’s central bank said it would “place a higher priority on containing price rises and curbing inflation, and implement a tight monetary policy.”
  • The second quarter report, however, said the central bank would “make its top macroeconomic priorities maintaining stable and relatively fast economic growth.”
  • Inflationary risks “can’t be neglected,” the report noted, but added that “external demand will continue to weaken, and the negative impact on exports, economic growth and employment will emerge further.”
  • That shift in priorities was evidenced in July, when the Bank of China raised lending quotas for national banks by 5% and regional lenders by 10%, potentially allowing banks to extend about $26.3 billion (180 billion yuan) in extra loans over the rest of 2008. Those limits previously had been put in place to crack down on excess liquidity flowing freely through the market.
  • Concerns over China’s export health will translate into a complete reversal of the current tightening policy,” Donald Straszheim, vice chairman of Roth Capital Partners LLC told Bloomberg News. “Maintaining economic growth is now number one.”

It might seem funny, growth concern while the worst case scenario is 8% growth in 2009, but that’s the way things are. China is like a bike that can’t slow down, otherwise it will fall over. This is because it’s still in the midst of the big transition from an agricultural economy toward an industrial (and services) economy.

This produces a mass migration to the cities from the countryside, people get much more productive jobs in industry, which is the motor of Chinese wealth creation. However, the shadow side is that because productivity growth is so high, overall economic growth needs to be even higher in order to create the jobs for all these people from the countryside.

If that doesn’t happen, unemployment will rise and that could lead to civil unrest, which is the one potential problem that really intimidates Chinese authorities. Their legitimacy is closely tied with their ability to provide jobs.. Hence the policy shift.

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