Baltic Business Research

On May 11, the Chinese administration published with well-known speed some very interesting statistical data for April which seem to confirm my previous concerns from February 10. In this outlook on China for 2010/11, I had some remarks that get more momentum when reading some of the latest statistics. (These remarks from February are still available by taking the following steps to get to my LNU blog:      In Swedish, LNU.se à Forskning , med hänvisning till min blogg längst ner till vänster, där man för övrigt också kan hitta min senaste blogg före denna med allehanda tvivel angående en snar EMU-anslutning av de baltiska länderna).

In February, some of my concerns were expressed the following way:

–About inflation:  “There is an obvious risk that Chinese inflation later this year can go through the unofficial comfort ceiling of 4 percent…”

–About monetary/credit policy and the bubble risk:  “The risk is obvious that the government’s far too loose monetary policy has contributed to the dumping of money in risky and unprofitable projects” and that “recent tightening still means expansionary money/credit policy…Assuming the continuation of an only slightly more restrictive policy by the central bank, there will be at least twice the amount of new loans as in the years before 2009…Some more efficient fight against credit exuberance and inflation should come in the forthcoming quarters…”

–About exchange rate policy:  “I expect a return to the previous cautious Chinese appreciation policy in the latter part of 2010 or the first half of 2011 – but not before a more stable and export performance has been visible for at least a couple of months…”

Recent statistics shows some real Chinese hard facts. First, inflation in April got back to the uncomfortable trend from the beginning of this year (CPI: 2.8 %). Second, new bank loans soared in April to 774 billion renminbi or roughly 113 billion USD – an increase that cannot be regarded as soft as the dampening officials would like to see. Consequently, gradually increasing cash requirements by the banks are not enough. China also needs higher interest rates. With new information about inflationary pressure and ongoing strongly increasing credit activities, there is no reason to revise my forecast from February: “The most likely scenario is therefore that China this year will go for at least two interest rate hikes with 0.27 percentage points each time (2+7=9=good number). Another one or two hikes within the forthcoming year (comment: until the end of February 2011) would certainly not be a surprise if GDP growth has been established on a relatively steady course…” This latter assumption seems to become verified in the forthcoming quarters.

It can be added that I now tend to revise my forecast on Chinese GDP growth in 2010 from 9-9 ½% to 10-10 ½%. In other words: In my eyes, Chinese interest hikes are on their way even more likely. So is probably the renewed switch of Chinese exchange rate policy later this year from strictly pegging the USD to a slight appreciation process vis-à-vis the USD. Strategic exchange rate decisions, however, are an issue for the highest Chinese leaders. For this reason, currency forecasts for the RMB should be handled with necessary cautiousness – despite the strictly border control of financial cross-border transactions.

Summary: Unfortunately, my recent warnings on the Chinese economy seem to be on track.