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China’s economy shifts into a higher gear

posted on November 11, 2009 at 8:30 am
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Good news, bad news from China.

Good news first: China’s economy continues to roar ahead.

Retail sales climbed at an annual rate of 16.2%. Exports slowed their slide and the trade surplus almost doubled to $24 billion in September. GDP growth looks well on its way to exceed 10% in the fourth quarter of 2009. The Chinese economy grew by 8.9% in the third quarter.

All that’s good news for investors counting on China to power the global economic recovery until the U.S. economy can pick up some momentum

Now, the bad news. China’s money supply grew at a record annual pace and money poured into urban fixed-assets. That’s another word for real estate. Investment in those assets has now increased by 33% in the first ten months of the year.

That will worry investors who fear that China is creating an unsustainable bubble built on cheap money.

With the economy soaring and liquidity racing ahead, the guessing now focuses on when the Beijing government will start to rein in the money supply and when it will end the dollar peg for the renminbi that has been in effect since the global economy went into a stall. The renminbi has been pegged at 6.83 to the dollar since July 2008. The Chinese government had allowed the currency to appreciate by 21% against the dollar in the previous three years.

The betting now is interest rates in China and the currency exchange rate will start to rise in March. That would give the economy another four months or so to build up momentum.

That delay will b e painful for China’s trading partners who are already suffering from competition with a cheap Chinese currency. Another four months of momentum, however, would be good news for commodity economies, commodity producers, and any supplier that sells to China.

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  • dsobek on 11 November 2009

    China is going to keep the renminbi cheap for as long as possible. While everyone concentrates on the dollar weakness, people seem to ignore the renminbi weakness. I think it is becoming obvious that China and the US are keeping their currencies weak to pull themselves out of the recession and it is being done to the detriment of the EU and Japan.

  • robert1234 on 11 November 2009

    I really do not think America is keeping its currancy weak to pull itself out of depression. If they were, that money would be entering the US economy,, and it isn’t.

    I suspect that ther US currancy is being kept weak, because of the carry trade. The Fed keeps interest rates at ZERO, the big money players borrow all the money, and put the cash into the stock market, driving it up humungously ! Later when rates change they will short the market, and we will be back to 6000.

    All the while the banks will be refunded… on the backs of the world’s investors.

  • dblwyo on 11 November 2009

    Michael Pettis is an ex-hedge manager current Carnegie Fellow and professor at a top Beijing Univ. and follows Chinese econ, policy and finance pretty closely. His series on these topics is as valuable as anything and this recent post puts the key issues in a nutshell:
    What rebalancing of Chinese and American consumption?

  • twoyrfixed on 12 November 2009

    Thanks. Good read. Didn’t realize that the GDP growth was entirely “covered” by a drop in savings! Maybe I’m just a simpleton, but absent some gamechanging event, the USA seems to have gotten itself caught in quite a pickle.

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