Economic Update. A Perfect Storm?

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China’s economy may have been spared the worst of the sub-prime write-downs (though the Chinese banking and political system has some interesting experience in the area of non-performing loans!), but the economic situation is not without challenges. Leading the problem pack is inflation. Xinhua reports:

    “The Industrial and Commercial Bank of China (ICBC) is forecasting an 8 percent increase in the country’s Consumer Price Index (CPI) for the first quarter of 2008. The official government figures come out in mid-April.

    The bank said in a report issued on Thursday that the CPI would hit 8.2 percent in March, slightly down from the previous month as the effects from the snow chaos that hit China earlier this year died away.

    Inflation in China took its biggest jump in nearly 12 years in February when it rose 8.7 percent compared to the same period a year earlier. Food prices surged 23.3 percent while non-food prices edged up 1.6 percent from the year earlier period.”

    …However, the inflation index would start decelerating in the second half of 2008 as the government’s macro controls took effect. The continued global slowdown also weighed on demand and could gradually pull down prices, the report said.

    China rolled out a series of measures to fight inflation after the government was reshuffled last month. Among the latest moves was an increase in farm subsidies to boost production and curb grain price hikes.”

Inflation is still at te top of the list, but could a “perfect storm” of problems be on the way, as suggested in the Standard?:

    “China’s GDP growth could decline to as low as 7 percent this year, the Asian Development Bank warned yesterday.

    It said this worst-case scenario could play out if severe global economic weakness combines with a major downturn in mainland property or stock markets at the same time as a more aggressive tightening of credit prompted by a surge in inflation.

    Standard Chartered economist Kelvin Lau Kin-heng agreed it was possible for a confluence of factors to come together in a “perfect storm” to weigh down China’s growth this year.

    …A tightening of credit in China, triggered by inflation fears, could combine with a slowdown in exports and export investment caused by the floundering US economy, Lau said.

    …The ADB’s base forecast is for China’s economic expansion to slow to 10 percent this year, and 9.8 percent in 2009, from 11.4 percent in 2007, on the back of tighter domestic monetary policy and weaker external demand.

    Consumer price inflation is expected to jump to 5.5 percent this year and remain around 5 percent in 2009, up from 4.8 percent in 2007, the ADB said. It predicts weaker global demand for exports will slow growth dramatically to 19 percent this year, and to 18 percent in 2009, from 26 percent in 2007.

    Mainland authorities are expected to permit faster appreciation of the yuan against the US dollar this year, as the trade surplus and surging capital inflows contribute to excess liquidity. “

Inflation is something the government will be keen to control for political as well as economic reasons, but the balancing act is likely to be a difficult one.

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