China had better get its domestic stimulus spending right, without too many fluffs, otherwise we, along with the rest of the world, are stuffed.
The same can be said of Japan where an unpopular Government is trying to spend the economy into some sort of turnaround ahead of a difficult election due in the next few months. China has the luxury of not needing an election, and being an authoritarian state it can spend where it wants and how much it wants, without any debate.
But they need to make their decisions as accurate as possible: a bubble or surge in a sector like property might provide short term gain, but equally it could pop and plunge the economy back into a slump.
This morning China’s central bank revealed that new lending had doubled in May from May of 2008. But it was the second lowest lift in lending this year after the explosion of credit in the March quarter (March lending absorbed 80% of the annual quota). There has been a clear slowing in lending since March.
The rapid growth in lending is another sign of just how desperate the Government is to make sure the domestic rebound works. They are throwing money at the banks and urging them to lend (No wonder the stockmarket has been rising all year and is up 54%. And why car sales are soaring, but imports are down 30%. The Government wants to keep the benefits in the country). But the high lending rates have raised fears of a spending bubble in some sectors, with fears of inflation and a possible slump if the government is forced to rein in lending and tighten monetary policy.
China’s domestic spending needs to happen because there’s just no action in the global markets: Japan’s exports are still down by more than 30% (and industrial production is off 31%), but China’s exports fell a record 26.4% May on May. Imports fell again: it was the seventh month of falling exports in a row.
If their domestic spending failures to steady, and ignite some sort of recovery, China and Japan have nothing to fall back on internationally because there’s just no demand for cars, cheap goods, chemicals, electronics products and the like.
And if there’s no domestic rebound, especially in China, then our mild recession will become a nasty one next year. That would embarrass the Government and the Reserve Bank which have staked all on a China rebound being successful.
We’re hostage to the Chinese Government (with Japan as a bonus) spending on its economy — not a comfortable place to be in at the moment with employment weakening slowly, but not dramatically, so far.
The flow of figures from big economies like Germany, China, Japan and the US confirm there are green shoots around, but they are nothing more than minor improvements or a steadying in the rate of decline. There is simply nothing substantial happening in the global economy that you can point to and say that will drive growth late in 2009 and in 2010. In fact the prospect of rising oil, metals and soon, grain prices is starting to worry some economists about the potential re-run of 2008 that could be underway.
In Japan, growth contracted by 3.8% in the first quarter, but government spending is strong, up 21% in April from a year earlier. Hopefully that’s a lot of iron ore, coal, steel, copper, LNG and oil ordered from the likes of Australia.
In China central government investment rose 33% year on year in the first five months of this year; taxes are being slashed (the GST was restructured earlier in the year) rebates are being raised on exports, more than 2600 items were given higher rebates last Monday.
Chinese car sales are soaring (lots of steel and rubber and plastic and copper there), up 47% year on year and could hit 11 million this year, easily topping America’s barely 10 million. In Japan car sales rose 7% in may following tax changes.
Inflation is falling; its more like deflation, investment is rising, thanks to Government spending, exports and imports are falling, because of the global slump.
Producer prices fell 7.2% in May from May 2008 because of the plunge in commodity prices (especially coal and iron ore with oil lower than it was 12 months ago).
Consumer inflation fell around 1.4%, slightly better than the 1.5% fall in April. It’s deflation, but unlike Japan (where consumer prices fell and producer prices dropped more than 5% in the latest report), it’s not yet a problem in China. Excess capacity is pressing down on price levels (although petrol and diesel prices were allowed to rise from June 1).
China’s trade surplus was $US13.39 billion in May. The combined value of imports and exports in May was worth $US164.13 billion, down 25.9% in the year to May and off 3.1% from that for April. Japan’s trade surplus narrowed in April as well, even though imports are weak. Exports are just not happening.
Exports in the five months to May totalled $US426.14 billion, down 21.8%, and imports went down 28% at $US337.34 billion.
To help to sustain spending, the government late last month cut capital requirements for investments in projects in the coal industry, roads, airports and property.
Xinhua newsagency reported that the growth rate in spending in the primary sector (farming, fishing, forestry and the like) remained highest, up by 79.7% in the first five months. The secondary sector saw investment rise by 29.1% and the tertiary sector by 34.9%.
Investment in real estate rose 6.8%, 1.9 percentage points higher than the first quarter.
“From January to May, 123,878 new projects were begun, 39,510 more than a year earlier, with total investment surging 95.9% to 5.33 trillion Yuan,” Xinhua reported.
The will and intent is there to make the domestic stimulus spending work effectively, the projects are there in all their Rudd-like numbers — China had better get it right.