Special Report

The SCB China Chartbook: Q2 2008

I. Growth
Domestic demand remains robust, but exports are weakening while tightening measures are just beginning to bite. Lobbying against tightening is on the rise.

II. Money
Credit controls means tighter money, and eventually slower money growth. The negative effects are concentrated in the SME sector. Sterilisation campaign continues.

III. Trade
Commodity imports were up strongly in dollar terms in Q1, while exports to the US slowed to a halt, meaning an overall deficit in Q1.

IV. Inflation
Food and non-food prices are still rising, and real rates have moved further into negative territory. House prices are rising on fast income growth. Fighting inflation remains Beijing's #1 priority.

V. Currency
An apparent slowdown in CNY appreciation pace, alongside a burst of dollar liquidity onshore meant onshore forwards were on the bid. We do not expect it to last. We call a 15% rise against the USD for this year, to CNY 6.35.

VI. Energy
Coal disruptions are not quite over. With coal prices up though, household electricity prices will come under huge upward pressure over 2008-09. Crude oil import growth remains strong, while products demand has increased rapidly as loss-making refineries struggle to keep up.

VII. Metals and grains
Steel production growth continues to slide, though with limited domestic capacity iron ore imports are strong. Concern growing over China's grain situation, with bad weather and low grain reserves.

VIII. Structure
China's overall growth model is still investment/export focused; only slower growth and time will change that: perhaps a slowdown is just what is needed. Fiscal trends are supportive for more social spending, which seems to be happening, albeit gradually. Manufacturing wage rises are good - they help rebalance income inequalities - and are partly caused by demographics.