UBS China Question of the Week - Why Is IP Growth Falling Sharply?
October industrial value added grew by only 8.2% y/y, the slowest pace <br/>since mid 2001 and far below market consensus. Why is China's industrial <br/>production decelerating so suddenly? <br/> <br/>Our Answer <br/>- Given what has been happening in global financial market and the <br/>sudden drop in economic activity in developed economies, it has been <br/>suggested that China has been hit hard by this financial crisis. <br/>Actually, data suggest that it is China's domestic demand that is <br/>weakening much quicker than its exports and [the domestic weakness] has <br/>led to the slowdown in IP growth. Export-related slowdown is still in <br/>the pipeline. <br/>- What led the decline in the growth of industrial production has been <br/>the drop in iron and steel production (Chart 1), which saw a sharper <br/>decline in production than the previous slump of 1997/98. The slowdown <br/>in energy-intensive sectors such as iron and steel has also led to a <br/>steep deceleration in the power sector. This has caused many who assume <br/>a fixed relationship between electricity consumption and GDP growth to <br/>question the accuracy of overall growth data, while we think the uneven <br/>slowdown in the economy has suddenly reduced the energy intensiveness of <br/>growth. <br/>- The weakness in housing related construction activity is by far the <br/>most important driver for decelerating domestic demand, especially that <br/>for steel, cement, consumer durables, and other related products (Chart <br/>2). With housing sales and new constructions now declining, we see a <br/>further drop in domestic consumption of steel and related products and, <br/>therefore, more downside in production in these industries. An unusually <br/>high accumulation of inventories in some sectors (iron and steel again) <br/>has exacerbated the downward adjustment in production. <br/>- The latest trade data also corroborate the view that exports are <br/>holding up better than domestic demand, despite a global downturn. While <br/>real export growth continues to grind down, real import growth collapsed <br/>in October (Chart 3) and, together with a sharp fall in import prices, <br/>this resulted in the largest monthly trade surplus in China's history - <br/>$35.2 billion. <br/>- Looking forward, however, export growth looks set to decelerate <br/>sharply, and we can already detect this trend from both the weak <br/>electronics production (Chart 1) and sharply falling export orders <br/>(Chart 4). Actually, domestic new orders and export orders are both <br/>falling in tandem, which does not bode well for industrial production in <br/>the coming months. Even though the government's fiscal and monetary <br/>stimulus could start to kick in as early as Q4 2008, the downward <br/>pressures from weakening domestic and external demand will likely <br/>dominate in the near term, leading to slower IP growth in the coming <br/>month. <br/> [attach]9610[/attach]<br/> <p>IP?</p>页:
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