China’s Tightening Measures Taking Effect

Wen Jiabao at WEF Annual Meeting in Davos 2009

Image via Wikipedia

In order to combat rising inflation, the number one problem facing the country today, Beijing has been tightening credit conditions in recent months, raising interest rates on four occasions. For anyone who doubts that China’s tightening measures are having an impact, take a look at the numbers coming out of the country for construction machinery and car sales. These are big ticket items that are sensitive to credit conditions and indicative of both business activity and consumption.

In May, sales of 22,805 wheel loaders were only 2 percent higher than sales in May, 2010. Moreover, when compared to sales in April, May’s numbers represented a 20 percent drop in units sold. The story is even worse for excavators. The 14,654 excavators sold in May represented a 13 percent decrease from the year before, and a 46 percent drop from April’s levels.

Likewise, China’s red-hot auto industry has been stopped dead in its tracks by credit tightening. Car sales in China dipped 0.1 percent in May from a year earlier, marking the first decline in more than two years amid a steep slowdown in the world’s biggest auto market. Year-to-date, passenger car sales are up only 6.1 percent, a fraction of the 63.6 percent jump in 2010. Overall vehicle sales in May, including trucks and buses, fell 3.98 percent from a year earlier to 1.38 million units.

While sluggish sales are bad news for the auto and machinery industries, they are good news for inflation, which has been climbing steadily since August, 2009, reaching 5.5 percent in May, its highest level in three years. Friday brought hope, however, that China may be winning its battle with rising prices.

In an opinion piece published in Friday’s edition of the Financial Times, Premier Wen Jiabao said that he is “confident price rises will be firmly under control this year,” and that China is “fully capable of sustaining steady and fast economic growth.” Premier Wen added, “There is concern as to whether China can rein in inflation and sustain its rapid development. My answer is an emphatic yes.”

The Shanghai Stock Exchange surged 2.14 percent on Friday on Wen’s comments.

Enhanced by Zemanta

3 Responses to “China’s Tightening Measures Taking Effect”

  1. http://politikalmatters.com

    Unfortunately, much of China’s local government’s funds come directly from the sale of land. This makes any attempt to curb housing prices difficult.

  2. The dip in sales for machinery and autos raises another concern. Doesn’t this affect the problem with domestic consumption? From my understanding with the imbalance of trade, China should be looking to stimulate domestic consumption, or am I mistaken?

  3. Hi I’m Jessica. I thought to post here to get aquainted with every body

    I have been a long time lurker of managingthedragon.com and figured it’s time to sign up and say hi! I look forward to becoming an active member on here!
    ~TC Jessica