China Urban Investment Soars, But Deflation Spreads As Japan Tanks

POLITICAL ECONOMY

China prices fall for first time since 2002
China Tuesday reported its first drop in consumer prices in more than six years, adding to worries about how the world's third-largest economy is weathering the global slowdown. With the cost of food, clothing and fuel declining, the consumer price index -- the main gauge of inflation -- dropped 1.6 percent in February from a year earlier, the first such fall since December 2002. Chinese Premier Wen Jiabao said last week that he expected the country to meet a target of eight percent growth this year, but deflation could put that goal at risk, analysts say. Price falls raise concern about a cycle of deflation, as consumers put off major purchases, expecting costs to keep going down. The slowdown in sales pushes prices down further, making growth that much harder to achieve. "Sustained price declines are concerning to policy-makers because deflationary expectations often lead consumers to defer purchases, resulting in further downward price pressure," said Jing Ulrich, an analyst with JP Morgan. In the first two months of the year the consumer price index was down 0.3 percent from the same period in 2008, the national statistics bureau said. The State Information Centre, a government think-tank, forecast that the consumer price index would fall one percent in the first quarter. The statistics bureau also said producer prices, an indicator of trends at the wholesale level, were down 4.5 percent in February from a year earlier. "It's natural as the price of everything, including oil and foods, is falling," said Ren Xianfang, a Beijing-based analyst with research firm Global Insight. "It's a reflection of the global deflation." The statistics bureau argued that the massive inflation in February last year -- a 12-year-high of 8.7 percent -- made for a high base that further helped explain the falling prices last month. The inflation figure was the first in a series of data to be issued this week, giving a first clue of what has happened to the Chinese economy so far in 2009. The Chinese economy, which is heavily dependent on exports, has seen growth slow as demand weakens because of the worldwide recession. In the fourth quarter of last year, it expanded by just 6.8 percent -- well below the eight percent that China's policy planners believe is the minimum needed to avert wide-scale unemployment that could trigger mass social unrest. Overall growth in 2008 was nine percent -- the first time since 2002 that growth was in single digits. Since the crisis emerged last year, the government has introduced a four-trillion-yuan (585-billion-dollar) stimulus package and instituted a series of central bank interest rate cuts to boost the economy. Chinese officials have said there are some tentative signs the package, announced in November, is having an impact, but the latest data indicated more would have to be done. Analysts said the case for further interest rate cuts was becoming stronger. "For an average middle-class household, the habit of saving still outshines any temptation to spend," said Sherman Chan, an analyst with Moody's Economist.com, in a research note. "The central bank needs to cut interest rates now so that the incentives to save will diminish," she said. Su Ning, a vice governor of the central bank, was also quoted as saying Monday that China had room for further interest rate cuts and other measures to help weather the global crisis. China has cut interest rates five times since September last year, most recently on December 23. Chinese stocks rose 0.52 percent in the morning session on hopes that the inflation data could spur the government to undertake new measures to boost growth.

by Staff Writers
Beijing (AFP) March 11, 2009
Chinese investment in plant and equipment soared in the first two months of the year, the government said Wednesday, indicating an economic stimulus package was kicking in.

Spending on fixed assets in January and February in Chinese cities surged 26.5 percent in January and February compared with the same two months a year ago, the National Bureau of Statistics said.

The figure indicated benefits could be emerging from a massive four trillion yuan (580 billion dollar) spending plan announced by the government late last year to bolster the economy during the global financial crisis.

"As the impact of the government's... investment stimulus gradually begins to come through, we expect fixed asset investments to rise further in the months ahead," Hong Kong-based Nomura analyst Sun Mingchun said in a note.

The figure was slightly higher than the 24.3 percent growth in fixed asset investment registered for the first two months of 2008.

Investment funded by the central government was up 40.3 percent in the first two months of the year, the statistics bureau said, suggesting that Beijing's policies had a lot to do with the surge.

"Since the beginning of the year, the government has repeatedly stressed it wants a good start and the investments should be in place at an early date -- this is the main driver," said Lu Zhengwei, a Shanghai-based economist with Industrial Bank.

Fixed asset investment is among the most closely watched of numbers in China as it gives an idea of the state of fiscal spending, which has attained extra importance during the economic slowdown.

earlier related report
China prices drop, Japan stocks hit fresh 26-year low
China Tuesday said it had hit deflation for the first time since 2002, ramping up fears over how the Asian giant is dealing with the global slowdown, as Japan's stock index fell to a new 26-year low.

Beijing's commerce minister warned of "grim" months ahead for trade and Malaysia, another of Asia's export-driven economies, prepared to unveil a multi-billion dollar stimulus package to halt its slide into recession.

China's statistics bureau said consumer prices -- including food, clothes and fuel -- were 1.6 percent cheaper in February than a year earlier, the first such fall since December 2002.

Chinese Premier Wen Jiabao said last week that he expected the world's third-largest economy to meet a target of eight percent growth this year, but analysts say deflation could put the goal at risk.

"Sustained price declines are concerning to policy-makers because deflationary expectations often lead consumers to defer purchases, resulting in further downward price pressure," said Jing Ulrich, an analyst with JP Morgan.

The government has outlined a massive stimulus package and instituted a series of central bank interest rate cuts to boost the economy. China, which is heavily dependent on exports, has seen growth slow as demand slumps.

In the fourth quarter of last year, it expanded by just 6.8 percent -- well below the eight percent that China's policy planners believe is the minimum needed to avert large-scale unemployment that could trigger mass social unrest.

Meanwhile Japan's Nikkei stock index closed down 0.44 percent or 31.05 points to 7,054.98 after another sell-off on Wall Street, hitting the lowest level since October 1982 for a second straight day.

Other Asian markets steadied. Australia gained one percent and Hong Kong was up 3.1 percent at the mid-day break.

Malaysia's deputy premier Najib Razak was due to announce details of the government's latest spending plan in parliament.

Malaysia unveiled a 1.9-billion-dollar stimulus package last year but has acknowledged it needs a larger and more comprehensive mini-budget to avert the threat of a recession.

A government official familiar with the plan told AFP at the weekend that it could be worth up to 9.4 billion dollars.

Hong Kong's securities watchdog said it was investigating a last-minute sell order that pushed shares in banking giant HSBC to their lowest level in almost 14 years.

One single transaction almost doubled the day's losses for shares of HSBC, which ended down 24.1 percent Monday at 33 Hong Kong dollars and wiped more than 16 billion US dollars off the bank's capitalisation.

It is believed the shares were dumped by short-sellers hoping to buy them back at a lower price once the bank completes its planned rights issue to raise capital.

HSBC had clawed back 14.6 percent in Tuesday morning's Hong Kong trade.

In other developments, the Dow Chemical Company said it would complete its takeover of Rohm & Haas in a legal settlement that provides Dow with up to three billion dollars in new cash.

European aerospace group EADS announced a return to profit in 2008 of 1.987 billion dollars, beating analyst forecasts, and workers at struggling US carmaker Ford ratified a deal that will save billions in healthcare costs.

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POLITICAL ECONOMY

Hong Kong's financial secretary says 'worst is still to come'

Hong Kong (AFP) March 9, 2009
Hong Kong's financial secretary John Tsang said Monday the global economic slowdown would get worse before it got better, as he sought to justify his prudent annual budget.

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