Climate indexes Analysis

The draw role of classification prices of CPI (2006.1－2007.5)

Residents dissatisfied with the right price, more than half residents forecasted prices will rise in the third quarter. The survey results in 50 large, medium and small cities and towns’ depositors which hold by People's Bank of China in 2007 May mid to late showed: Residents satisfied with the current price achieved a new low; Half residents forecasted prices continued to rise.

Purchasing Managers Index (PMI) decreased from peaks, the purchase price index rebounded. In May, the Chinese manufacturing index (PMI) issued by Chinese Federation of Logistics and Procurement remains high, but the overall decline, in the 12 indicators, only the purchase price index rebounded. The new orders index and the production index down synchronous balanced, which illustrate the basic stability of supply and demand; The new export orders index dropped last month, which illustrate the slowdown in the growth of domestic and foreign demand. The purchasing price index from January 2007 has been continued to rebound, which illustrate there are exist certain pressures of price rise.

Forecast of GDP growth in future

1.  Forecast of international economic situation

Global economic growth has slowed down, but it will remain stable and rapid growth. In April 2007, the International Monetary Fund (IMF) forecasted the economic growth on the major economies, it believed that world economy will slowdown, but still maintain steady and relatively fast growth. Expected in 2007 and 2008, world economic growth both will reach 4.9%, lower 0.5% than in 2006, and by maintain the consensus forecast in the end of 2006. 

The positive factors which promote the growth of the world economy in 2007 are: the source of the world's economic growth will continue to be diversified. Asian capability which withstand the cool off economy of American increased, the euro area, Japan and China and other emerging market economies maintain various degrees of growth momentum, ensure the continued growth and stability of the world economy; The labor market conditions of major industrial nations continue to improve, the unemployment rate will be maintained at a lower level or continued decline; The rapid growth of international trade and the introduction of new technologies improve the labor market globalization, and promote global economic growth.

World economic growth is faced with a major uncertainty factors: the increasing volatility in financial market; Potential pressure of inflation is greater, and the recent surge of international crude oil prices further increase the pressure; The adjustment costs of imbalances in the global economy is high, trade protectionism damage international trade and investment .

2.Forecast of Domestic economic situation

There is a certain pressure on the investment rebounding, the growth rate will increase in the second half year-on-year. The main factors which constraint the excessive growth of investment in 2007 are: In accordance with the scientific concept of development, the state will continue to strictly guard the land, credit and strict implementation of the technical, environmental, safety and other market access standards, and control the scale of investment in fixed assets. Under its influence, power, iron and steel, non-ferrous metals, coal, oil industry plants and other high Energy-consuming industries will slow the rate of investment; The regulatory role of market to fixed assets investment gradually strengthening, investment growth rate of the excess capacity and potential excess capacity industries will continue to decline.

The momentum which promote investment continued to maintain a rapid growth including: local investment remains strong impulse; Corporate profits improved, the source of funding liberal and  investment enthusiasm high; According to the Central requirement of optimizing the investment structure, in the process of optimizing the investment in the regional structure, industry structure and product structure, state will speed up water conservancy, energy, railway lines, National Main Road and other important infrastructure construction, actively guide social capital investment in rural agriculture, social undertakings, and independent innovation, resource conservation, environmental protection and the central and western regions, the new rural construction, the development of western China, central regions rise, revitalizing Northeast China and the investment in coastal area will continue to maintain rapid growth. 

Consumption growth will continue to maintain a rapid momentum, and annual growth rate will not less than 15%. The strong economic growth and the rapid growth of residents’ income, which provided a strong support to the further growth of consumption, the effect of expand domestic demand and promote consumption and other measures gradually become apparent, the growth in consumption has become the driving force of sustained economic growth. The growth of residents’ income reached a record high level, which laid the foundation for consumption growth.

Analysis showed that residents’ income growth have significant correlation with a lag cumulative growth rate in the total retail sales of consumer goods in the same period last year, the weighted revenue growth of urban and rural residents was 18.5% in the first quarter in 2007, according to estimates, retail sales of consumer goods would continue to show high growth trend in the second quarter, an accumulated growth rate may reach 20%; The government will further intensify efforts to adjust the national income distribution structure, enhance the proportion of initial distribution of labor remuneration; While at the same time, vigorously developing consumer credit, increasing financial transfer payment and the support to social security, social welfare undertakings, which will increase the disposable income of residents, improving consumer expectations, promoting consumption growth; The stock market wealth effect will promote the growth of consumption to some extent. 

Export growth will drop slightly, import growth will be slightly higher, and the trade surplus growth will decline.

Export growth to be slightly dropped. The favorable factors of the growth of China's export in future are: the world economy will continue at a more stable growth period in the second half of 2007, although the U.S. economy slowed slightly, but to some extent, it can cancel out from China's other major trading partners’ increased demand for imports, such as the European Union, Japan and other emerging market economies;  As China's industrial structural adjustment and optimization, the technical level of export products will raise, in addition to the implement of export tax rebate rate increases policies of high-tech products and part mechanical and electrical products the in 2007, export competitiveness will be strengthened, export structure will be further improved; The increase of trade autonomous of collective and private enterprises will encourage enterprises to actively explore more extensive overseas markets, exports of collective and private enterprises will further increase.

The constrained factors of Chinas export growth in future is: the rising of trade protectionism and more severe price competition from competitors; effects of accelerated revaluation of the RMB. After the reform of exchange rate formation mechanism, the RMB against the dollar continued to appreciate. Along with the expected Federal rate cut dissipated and the gradually recovered of United States economy, the dollar started strong, driven the rise of RMB against other major currencies, the effect to restrain China's exports will gradually become apparent.

The inhibitory effect of trade measures on the export control. In order to restrain the excessive growth of exports, China's implement many control measures, gradually abrogate export rebates, and imposed export tariffs on the high energy consumption, high pollution and resource-type products. 

Import growth will be increased slightly. The second half of 2007, China's import growth rate will be further improved, mainly because: China's economy continued to maintain rapid and stable growth, investment in fixed assets has picked up and the investment scale is still larger, the demand on foreign energy, raw materials and products will remain strong; Foreign trade control measures have promotion effect on imports. From June 1, China reduced import tariffs of resources materials, key parts and components and the use involved people daily; The promote role to imports of RMB gradually rise will gradually become apparent. From 1-5 months, China's imports grew 19.1%, the growth rate dropped by 2.9 percentage points than the same period last year. Under the overall influence of these factors, the import growth rate will be increased slightly in the second half year.

Growth rate of trade surplus gradually slow down. Owing to the transfer of international industries, especially the manufacturing industry from other areas have moved to China, the processing trade is still the mainstay of China's trade, and domestic production has increased rapidly and the relative lack of consumer demand, China's trade surplus will exist at a certain period of time.

3.GDP growth is expected to 11.0% in the first half 2007, the total year is 10.8%

Assumption that the world economy growth rate is 4.8% in 2007, China's fiscal expenditure growth is 12%, interest rates maintain current level, under this premise, we forecast China’s economic growth and CPI changes trends in the future. Generally speaking, the growth rate of China's future GDP will show a rebound trend, but the margin of return will not be great.

The predictive value of GDP growth rates in 2007 2-4 quarter is 10.9%, 10.7% and 10.6% in model, GDP growth rates in the first half year and the annual were 11.0% and 10.8% respectively.

Forecast price changes trends in the future

1.Factors affect future price movements

(1)．Factors affect future price increase

International crude oil and non-ferrous metal prices have possibility of rise. The international crude oil prices will continue to remain strong. Currently, the United States has entered the summer driving high season, demand for crude oil reached the year's high level, while from June to November when is the season that hurricane frequent happen; Meanwhile, China, India and other developing countries’ economy maintain high growth rate, and oil demand remain strong rigid and present steadily increasing trend. Geopolitical politics, emergencies and speculative capital speculation and other factors also affect the price of crude oil lead to overall strength. Future international non-ferrous metal prices will continue to operate at a high level and is likely to rise slightly. At present, the world economy has rapid growth, the demand for the non-ferrous metals from developing countries remains strong, while the supply capacity of non-ferrous metals is limited; With the increasingly stringent ecological and environmental protection standards, non-ferrous metal production costs continue to rise. It is expected that non-ferrous metal prices will continue to operate at a high level in the future. The price increase of international crude oil and non-ferrous metals will still bring up the pressure of the increase of CPI and PPI.

Rose space of Pork and grain’s prices are limited, which do not bring the new upward pressure to CPI. In the third quarter, pork prices unlikely had substantial come down, it would stay high level: Currently, the amount of live pigs is lack, the supply growth of piglets is slow, The restoration of enthusiasm of pig-raising households and enterprises need a certain process, plus piglets to slaughter need four-month times, the slaughter volume need some time to picked up. Recently, some south regional occur pig high fever again, adversely affect continues; The prices of corn and other feed remain high level, the cost of piglets vaccination and other associated costs increased.

However, the space that pork prices rose is limited, the price will stabilize in September and October: pork price increases will lead to reduced consumption, the consumption of meat in summer is off-season, the overall demand tends will decline; The supply and price wave moving relatively small of alternative meat which have a certain role to pork consumption, such as beef, mutton and aquatic products, It will constrained the space of pork prices rose to a certain extent;

 Recently, the price of live pigs constantly rising, the price relations of pig and grain has been nine months higher than the profit and loss balance point 1:5.5, the add piglets’ enthusiasm of scale farmers further strengthen, when the new added piglets come into the market, the pork prices will restrained; State Council departments and local governments take a series of supportive production of live pigs, pig epidemic prevention measures, it will stabilize the supply of pork.

Grain prices exist slightly rise pressure, but not much room for up: the summer grain harvest, the total wheat supply and demand remain balance, the state has offered price of to protecting wheat purchase will further stabilize the price of wheat; The Ministry of Agriculture information show that the availability source of rice market reduced, rice demand return to warmer, the rising of rice cultivation costs and other factors will promote rice prices steadily rise; Although the state emergent suspended the project of food product ethanol fuel, but the production which has formed still will lead to industrial use of grain to maintain a rapid growth, meat and eggs prices rose also will pull the price of grain accelerate growth which used for feed, the price of corn still exist rose pressures; American Ministry of agriculture’s report shows that in 2007 the United States soybean acreage fell 8.382 million acres compared with last year, it expected to carry forward the new soybean stocks 320 million bushels, below the market forecast 337 million bushels on average, with the brisk domestic demand momentum for feed, supply tightening, the annual price soybean will continue to increase; Expected international grain stocks in mid-2007 down to 15.8% of the total amount of use, lower 11.2% than the average level from 1990, the demand for corn of ethanol production get rapid growth, supply-demand relationship further tightening, the international grain prices exist a new probability of rising.

Energy saving and emission reducing increase the upward pressure on prices in the future. May 23, the State Council issued the " Comprehensive work program of energy-saving and emission reducing", which determines the energy saving of emission reduction goals: to 2010, energy consumption of 10,000 yuan GDP from 2005’s 1.22 tons of standard coal drop to below 1 tons of standard coal, drop about 20%; water consumption per industrial added value reduce 30%; the total discharge of major pollutants drop 10%; urban sewage treatment rate is not lower than 70%, comprehensive utilization rate of industrial solid waste over 60%. The program calls for strict control the excessive growth of electricity, iron and steel, nonferrous metals, building materials, oil processing and chemical plants and other high-polluting industries. Energy-saving and emission reducing will increase enterprises’ input costs of environmental production and technology reconstruction, and eliminate backward production capacity will reduce the supply of correspond production, which will bring some upward pressure to price in the future.

The reform of resources product’s price will promote the rise of price level. The "Comprehensive work program of energy-saving and emission reducing" which issued by the State Council require actively and steadily push forward the price reform of resource products. In accordance with the principle of compensation governance costs, improve sewage charges standard, improve paid use of mineral resources system, and establish ecological compensation mechanism. The advancement of resource product prices’ reform will raise the price of coal, oil, electricity, water and other resource product, bring the upward pressure to PPI and CPI.

The increase of labor costs will drive up the price level. "2007 Population and Labor Green Paper" which issued by the Chinese Academy of Social Sciences on June 14 pointed out, that three quarters of village hadn’t young labor force to transfer, and the growth rate of China's working age population has declined year by year, the labor shortage is being spread from the coastal areas to throughout the country, It is expected that in the "11th Five-Year Plan" period the situation of labor supply long-term greater than the demand will change. Meanwhile, farmers and workers’ month wage continuous grow, and the growth rate accelerated year after year. From 2003 to 2006, the migrant workers that engage in production and business activities outside of the village, the per monthly wage from 781 yuan up to 953 yuan, with an increase of 22%. In addition, the social security and employment training costs of migrant workers are also steadily increasing. The continuous increase of labor costs will become the major driving factors of price levels upstream in future.

(2)．Factors affect future price drop

The adjustment of Import tariffs and export tax rebate policy will bring downward pressure to price in the future. Since June 1, 2007, China raised export tariffs of high energy consumption, high pollution and resource-type products, while implement provisional low import tariffs for part of the light industry products (mostly consumer). June 19, the country adjusted the export tax rebate policy again, from July 1, abolish and reduce the export tax rebates policy of some products. All of those make slowdown in export growth of corresponding products and the increase of import growth, domestic supply of capital goods and consumer goods increased, the level of competition intensified, which bring downlink pressure to price of capital goods and consumer goods in the second half year.

Production overcapacity of part means of production and consumer goods will bring downward pressure to prices. Since 2005, China's investment growth in the manufacturing sector remained above 30%, the new added production constant formation and release, and the demand is relatively insufficient, and the overcapacity of part means of production will gradually become apparent, the oversupply situation of consumer goods difficult change in a short period, which will bring downward pressure to PPI and CPI.

2.Forecast CPI growth rates is 3.0% in the first half year, annual is about 3.2%

Taking consider these factors, in the circumstances that international crude oil and non-ferrous metal prices have no big fluctuate, PPI will remained stable on the whole in the second half year, there is a certain downward pressure, the PPI growth rate will slightly down compare with the same period; In the circumstances that food prices have no big fluctuate, CPI increase pressure will slow down in the second half year, Impact by “tail-raising” factor, CPI increase will remain at over 3% compare with the same period, but in December will drop to 2.5%.

The predictive value of CPI growth rate in 2007 2-4 quarter is 3.3%, 3.5% and 3.2% in model, CPI growth rates in the first half year and the annual were 3.0% and 3.2% respectively.