Exports unaffected by economic adjustment
(China Business Weekly)
Updated: 2004-08-19 14:42

China's credit tightening appears to be capping inflation, while leaving the export sector in strong shape, indicate July data, which suggest the economy is slowing, but not crashing.

China's producer prices rose 6.4 per cent in the year through July, the same pace as in the 12 months to June. That reinforces expectations that inflationary pressures are peaking.

Economists said the report backed other data, including last Tuesday's report of slowing factory output growth, that indicate the government's tightening measures seem to be working in the world's seventh-biggest economy.

They also indicate the central government has no need to clamp down further -- at least for now.

"I think it's a sign that steps to curb inflationary pressures and investment are showing effects," said Prakash Sakpal, an economist at ING Financial Markets in Singapore.

July's producer price index (PPI) was up 0.2 per cent from the previous month, half the month-on-month increase in June, the State Bureau of Statistics said.

China's statistics are not adjusted for seasonal patterns, which makes month-to-month changes difficult to interpret. But many analysts said the latest data pointed to a gradual cooling of an economy that has become a big driver of regional growth.

The PPI, which measures the price of goods at the factory gate, recently rose at its fastest rate since before the 1997 Asian financial crisis.

Before levelling off in July, PPI inflation had accelerated for four months in a row.

Worried that breakneck investment and resurgent inflation could trigger an economic bust, the Chinese Government instituted a raft of measures to curb lending and expansion in industries like steel and property.

The measures appeared to be taking the heat out of those industries, but other data last Wednesday suggested China's export juggernaut had been little affected.

Exports were US$51 billion in July, jumping nearly 34 per cent from a year earlier, while imports were US$49 billion, up 34.2 per cent.

Although the growth rates marked a slowdown from the year to June, when exports rose more than 46 per cent and imports 51 per cent, analysts said they were in line with earlier months and would stay strong as long as US and European consumers kept spending.

"If you look at the places where the investment curbs have been going in, it's things that are related to the domestic economy, like construction, automobiles, aluminium, steel and so forth," said Arthur Kroeber, managing editor of the China Economic Quarterly.

"Exporters were not so restricted. These guys are not affected by the cooling measures. The only thing they're affected by is shortages of power, the transportation bottlenecks."

China's exports have boomed as more foreign firms have turned to the low-wage country as a key production base.

Imports have also jumped as the booming economy sucks in more machinery, raw materials and components to keep its export engine chugging.

July's US$2 billion surplus was the third monthly surplus in a row, and compared with a US$1.6-billion surplus last July. It was roughly in line with the US$2.2-billion median forecast of seven economists surveyed by Reuters.

In 2003, China had a surplus in excess of US$25 billion, but rising oil and other imports gave the country a deficit of US$4.89 billion for the first seven months of this year.

Although China runs trade deficits with many neighbouring countries, such as South Korea, its large and growing surplus with the United States has become a politically charged topic that may heat up amid the US presidential campaign.

The PPI figures might mean consumer price inflation -- which quickened to a seven-year high of 5 per cent in the year to June -- could begin easing.

But the picture was complicated by signs prices of some products, such as food, have peaked, while others, such as power, were still climbing, said Rob Subbaraman, Asia economist for Lehman Brothers in Tokyo.

"So, it's a tough call, but we think consumer price inflation is close to a peak, and the year-on-year PPI number supports that," Subbaraman said.

Deutsche Bank economist Jun Ma said inflationary pressures still lurked in China, and that it was too early for the Chinese Government to start loosening its grip on credit.

"We're not expecting any big changes. It won't trigger any new additional (cooling) measures, nor will it lead to an immediate termination of the austerity programme," Ma said.

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