Chinese engine marches forward

Chinese powerhouse continues

Another year and yet another stellar growth performance from the booming Chinese economy! Although the data itself is at risk of a major revision at some point in the future, it cannot be disputed that the Chinese economic engine was working overtime last with real GDP estimated to have grown by 11.4 per cent, the fastest pace of expansion in 13 years. But 2008 promises to pose serious macro-economic challenges for the Chinese.

(1) Inflation has accelerated to an 11 year high and there are fears that this may prompt a further burst of social unrest
(2) Global demand is set to weaken following the effects of the credit crunch - Chinese exports contributed one third of GDP growth in 2007
(3) Official Chinese interest rates will continue to head higher as the monetary authorities look to engineer a modest slowdown in the pace of growth

There are tentative signs of a deceleration in Chinese growth - but 2007 marked the 5th consecutive year when real national output has grown by more than 10 per cent! Germany is looking over it’s shoulder as China zooms in on third spot in the league table of economies measured by GDP. Evidence of a huge emerging middle class looking for ways to boost their living standards comes with the data that retail sales in December 2007 were over 20 per cent higher than at the same time in 2006. Are Chinese consumers replacing US households as the main driver of consumer spending in the world economy?

The Financial Times in a leading article finds support for the idea that a moderation in Chinese economic growth will bring longer term benefits for China.

‘China in any case has reason to welcome, not fear, a slowdown. It is worth recalling that only a few months ago economists warned that Chinese GDP growth was too high and therefore unsustainable. A respite from double-digit growth might have several positive effects. It could deflate dangerous bubbles in real estate and in Chinese equities. It could – in line with official policy – relieve the intense pressure on natural resources and the environment imposed by runaway economic expansion. And an export slowdown could help limit the Chinese trade surplus, thereby disarming the US critics who are certain to become more vociferous as the US election year proceeds’

Latest Chinese macroeconomic data (latest month of data)

Interest Rate 3.57% Jan, 2008
Unemployment (% of labour force) 4% Jan, 2007
Retail Sales (annual growth) 20.2% Dec, 2007
GDP (Gross Domestic Product) 18.6% Oct, 2007
Current Account Balance $ 162857.962m Jan, 2007
Trade Balance $ 22687m Dec, 2007
Industrial Production (annual growth) 17.4% Dec, 2007

Further reading

BBC: China growth reaches 13 year high
http://news.bbc.co.uk/1/hi/world/asia-pacific/7206174.stm

Independent: China’s growth hits 11.4% but price rises cause alarm
http://www.independent.co.uk/news/business/news/chinas-growth-hits-114-but-price-rises-cause-alarm-773932.html