A blog on Chinese economy & society

Is China cooling off?

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The April HSBC PMI released today seems to suggest so.While still expansionary, the index fell to a six-month low of 55.4. On the other hand, the official government index released on May 1 showed a slight improvement, due most likely to different models being used for seasonal adjustment and the fact that HSBC index focuses more on smaller, privately owned companies.

But there are signs that the tightening measures are gradually working through the economy. It’s been reported that the banks are scrambling for deposits as the PBoC withdraws liquidity and raised reserve requirements. Volume for property sales has collapsed, by as much as 60% in Shenzhen. Buttressed by fat profits last year, the developers have mostly avoided cutting prices so far. But if volume continue to wither, pricing pressure will eventually be felt, especially when the new property tax and massive new supply got rolled out.

The melodrama on the other side of Eurasia also demands attention. Contrary to popular perception, the EU is actually China’s largest export market. The RMB’s dollar peg means that it has racked up huge gains against the euro. After all,  there was a reason why the Europeans were mum on currency issue during the recent G20 summit. Troubles with your largest customer could hardly be positive for business.

So is China starting to cool off? I don’t think so, not for now anywayz. Although official CPI is still very benign, on the ground inflation is rather high, especially for food and necessities. Rumors galore for upcoming major adjustments for subsidies on gasoline and natural gas. But given the performances of other sectors of the economy, hiking the interest rate now probably isn’t quite prudent either.


Written by Cindy Luk

May 5, 2010 at 4:46 pm

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