China Update

In the first half of 2008, GDP growth slowed from 11.9% (2007) to 10.4% mainly due to slowing exports. During the first 6 months, exports grew at the rate of 21.9% (down 5.7% from last year) to US$666.6 billion.

During the same period, reatil sales more than made for the slowing export growth raising 21.4% to RMB5.1 trillion. Fixed assest investments increased 26.3% to RMB6.84 trillion.

After 5 years of double digit growth, it is expected that GDP will only grow 9% this year (the smallest growth rate since 2002).

The Chinese government will be aggressively cutting lending interest rates (by at least 0.81% to up to 1.35%), deposit rates (by 0.27% up to 0.81%), and reserve requirements (by 3.5% up to 5.5%) over the next 12 months. See previous article.

The cut in interest rates is important but there is no lack of borrowers even at the present rates. More important, the cut in resewrve requirments will mean that banks are at last being allowed to re-start their lending which had been put on hold since 2006.

China is the one bright spot in the global economy where is growth albeit slower than before.

NOTE: I have been asked if I got my numbers wrong. Why 0.27% and not 0.25% (which is a quarter point) for those more familiar with the Western system. The answer is that China use numbers divisible by 9 in calculating interest rates (360 days basis). It actually makes sense when you start working the numbers.