The Government’s Macroeconomic Controls

China’s Purchasing Managers’ Index (PMI) fell to 52.1 in June from 53.9 in May, reports the BBC, but the figures suggested the [manufacturing] sector was still expanding rather than contracting. The report attributes the – relative – slowdown to government efforts to cool the property market and to curb bank lending. The central government insisted on larger down-payments on new homes and made it harder for investors to buy several homes. The BBC also quotes observers as saying that the faltering global recovery was affecting China’s output.

Xinhua explained early in June that

the PMI is one of the leading economic indicators. Simply put, when the number is above 50, the economy is in a state of expansion. In the opposite case, the number says that the economy is contracting (简单来说,若该数据高于50%,反映经济正处于扩张;反之,则说明经济衰退;而数据越高,则说明经济扩张速度越快).

The manufacturing industry’s June’s PMI was down to 53.9 per cent from April’s 55.7 per cent, writes Xinhua, and when looking at the individual indices, comparing May and April, ten*) indices had dropped – particularly in terms of new orders from customers (新订单指数, from 59.3 to 54.8) -, and the only exception among a total of eleven indices was the finished-products inventories index, which had actually risen, writes Xinhua, and reassures its readers by quoting HSBC China’s (汇丰中国) chief economist Qu Hongbin (屈宏斌) as saying that the manufacturing industry’s PMI indicated the effectiveness of the [government’s] austerity measures which alleviated the risk of overheating.

Besides, in another article, also of early June, Xinhua wrote that most of the recent drop in the PMI index was seasonal (季节性). When adjusted for seasonal influences, there was no obvious downward momentum. The economy would maintain a rather fast growth rate, and if there was a slight drop in growth numbers, and a [comparatively] strong one in PMI, this was only showing that imported inflation pressure was easing (在扣除季节性影响之后,回落势头并不明显,预计未来经济将继续保持较快增长,但增长水平或将略有下降,这其中,新购入价格指数大幅下降,表明输入型通胀压力得到有效缓解).

One news agency, two victorious but somewhat contradictory messages: so, how effective are the government’s measures to keep economic growth sufficiently cool? Inflation, even if not imported any more,

edged higher in May, exceeding the official target of 3 percent for the year, amid some initial signs that the world’s major developing economy’s investment has slowed,

Michael Pettis quoted China Daily in June, and added that the inflationary trend was rising.

The People’s Bank of China (PBOC) puts it this way: China’s economy is very likely to maintain steady and rapid growth in 2010, with more positive factors than last year boosting the economy, but the nation’s economy still faces a complex domestic and international situation.

It is imperative to continue implementing the country’s macro control policy and increase support for the economic restructuring and transformation of the economic growth pattern.

And chief state councillor Wen Jiabao (温家宝) told economists and business executives that “the domestic economy” was “developing in the expected direction under the government’s macroeconomic controls”.

Wen said policymakers must continue to strike a balance between maintaining stable and reasonably fast economic growth, carrying out economic restructuring and managing inflation expectations, writes China Daily.

If the Chinese government’s expectations are as vague as their macroeconomic tools, they can’t possibly be caught on the wrong foot. The CCP rules China on many different levels, and the cadres’ tools amount both to taking some advice from economists and to taking very different governmental views – from one central and many local perspectives – on what would be desirable goals in terms of growth numbers and their composition – and on what kind of results should be expected from the tools applied respectively.

But while no results may come unexpectedly under these conditions, they can be rather undesirable – both for the central and the provincial governments.

While the central government’s budget looks fairly balanced, except for the past year or two, the provincial governments’ finances are a completely different story.
The Chinese stimulus programs were decided in Beijing, at least nominally. But the implementation was arguably a provincial affair, with the provinces, or more specifically the provincial-government-owned investment companies, generating the flow of money – and incurring the corresponding public debt.
In March, Northwestern University’s Victor Shih told journalists in Beijing that as of November 2008, some 8,000 local investment companies took loans of at least 11 trillion – seven times the total revenues of local governments. The central government was facing a choice between quickly issuing restrictions on the flow of money, or let bad loans and inflation spread. “China’s leadership may prefer to let inflation rise, and to continue to make the banks lend money. They may not even wish to allow a healthy contraction, before determining the next generation of party leaders.”

If the foreign reserves Beijing has accumulated during the past decades are to play a role in recapitalizing China’s banks, there is certainly no open talk about it yet. And interestingly, party and state chairman Hu Jintao (胡锦涛), during the G20 summit in Toronto last week, seemed to join Timothy Geithner, Lawrence Summers, and other US economists and politicians in urging a cautious – if any – exit from the stimulus programs launched since the beginning of the global financial crisis in 2008: “We must act in a cautious and appropriate way concerning the timing, pace and intensity of an exit from the economic stimulus packages and consolidate the momentum of recovery of the world economy”, The Herald Sun quotes Hu.

After the G20 summit, China will have to expect less demand from traditional importing countries. Domestic demand may be of some help in the coming months – the cost of doing business in China is going up, David Bardoza wrote in the New York Times last month – “coastal factories are increasing hourly payments to workers”. And Eugen Weinberg, the Commerzbank’s chief commodity researcher, expects global commodity prices to drop: demand from China would noticeably recede (für den Rohstoffmarkt heißt das, dass die Nachfrage aus China deutlich zurückgeht und damit auch die Preise rückläufig sein werden), he expects in an interview with Handelsblatt.

If higher wages in China will add to savings, or really push consumption, remains to be seen. There is no such thing as a natural locomotive for the global economy these days.


*) according to Wikipedia as of today, PMI’s for other economic sectors and different geographical zones are issued by different organizations. China’s indices most probably differ from American or European ones.

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