China Economic Update

Things are slowing slowly and that’s a good thing.

With the trouble in Europe and the sluggish U.S. economy, an orderly Chinese slowdown is preferable to a crash.

The data from the latest NAB report on the Chinese economy shows that tighter monetary policy over the past year has achieved its goal of a soft landing. Domestic activity eased and GDP growth dipped slightly to end the December quarter at 8.9%, the slowest rate in more than two years. (GDP in 2010 was about 10%.)

Inflation ended 2011 at 4.4%, a little higher than the central bank’s target of 4% (our target is 2% to 3%). Inflation is important because too much of it reduces the central bank’s ability to use interest rates to stimulate demand.

On the subject of inflation, the pointy heads at NAB have two main concerns for 2012. First, a lot of money has been injected into the economy over recent years and this may become a problem. Second, rising incomes may push up prices. An interesting side bar is ongoing power shortages, caused by adverse weather conditions and low prices conspiring to ramp up consumption. The fix is in; the government put up electricity prices in 2011, but this is putting further pressure on inflation.

Europe accounts for more than a fifth of China’s exports, so it’s not surprising that those exports declined steadily over 2011. But imports also softened, leaving the trade surplus a little higher at US$16.5 billion. Surprisingly, retail sales in the December quarter were up nearly 18.1% on a year ago, despite the headwinds of tight credit, slowing growth and inflation.

Over all it’s a good outcome for Australia. Our major trading partner is continuing to grow but not at a scary pace, and it still has wiggle room to ease interest rates to fire up growth. Oh and happy Chinese NY, apparently this is a big one. Jeez, I hope it doesn’t dragon.

I’ll leave you with an unrelated thought from Alan Kohler of Business Spectator: “These days big government is ascendant and capitalism is in crisis, thanks to an excess of debt plus the fragmenting, democratising, pirating effect of the Internet. In fact, the way central banks in Europe and the United States are controlling the financial system these days with their emergency liquidity programs, we virtually have a centrally planned economy in the West. Meanwhile, the world’s most successful economy is a communist dictatorship.”