Baltic Business Research

Summary

●  Looking at Chinese statistics and recent developments – without considering statistical quality at this point – leads to the (current) conclusion that China has managed the global financial economic crisis quite well. However, good economic growth was maintained by massive injections of fiscal stimuli and incredibly easy monetary conditions for new credits. Of course, these enormous injections into the economy now lead to concerns about the quality of new loans, of new investments and future inflation. Around 60 per cent of the big stimuli package has gone – or is about to go – to state-owned companies. This tells us quite a bit about future risks for the banks and the economy as a whole.

Current cautious measures to reduce the rapid rate  at which new loans are granted are not a wise precautionary step to dampen speculation and overheating – as it has been said in many comments – but rather an attempt to minimize damage after last year’s Formula 1 speed.

●  New own China Survey (Feb, prel, final results after New Year’s vacation):

Overheating indicator: 8.4  (peak since its start in fall 2004,  Mar 2009:3.9). 

Forecast GDP growth 2010: 9.4 percent     2011: 9.0 percent.

●  Still, my own main scenario – which I made before the panel survey – is that China will achieve quite a good GDP growth in 2010, in the range of 9-9 ½  percent, despite more tightening of credit conditions and uncertain global conditions. Two interest rate hikes by 0.54 percentage points are implemented in this rate forecast. This is not a very scary tightening (however, it could turn out to be somewhat more than this). In all: The risks for this year’s development should not be neglected, particularly when it comes to inflation. There is a non-negligible probability that inflation will exceed the unofficial “comfort ceiling” of 4 percent.

●  More skepticism should be applied to 2011 – unless the global economy recovers more rapidly than currently expected. Next year, fiscal emergency stimuli will run out, credit conditions will be tighter, and the Chinese currency may return to its previous state of appreciating cautiously. Many imbalances will be – or remain – in place next year, too. For this reason, a somewhat lower range for Chinese GDP growth seems to be appropriate in 2011, around 8 ½ – 9 ¼ percent.

A warning may well be in order: China (risk) forecasts should be prepared more carefully than in the past. Following the herd is not good enough anymore.

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