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er20130409BullPhatDragon.pdf

er20130409BullPhatDragon.pdf

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Published by: Catherine Lawrence on Apr 09, 2013
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04/09/2013

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1
a weekly chronicle of the Chinese economy 
Phat dragon
# 157
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based arereasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
China’s consumer price index was up 2.1% on a year ago inMarch, well down from February’s 3.2% and the consensusforecast of around 2½%. The February outcome was infusedwith a holiday inspired spike in food price inflation to 6.0%yr.A partial unwinding of that movement explains most of thechange in headline inflation over the month. Fresh vegetables,pork and egg prices led the decline, while grains, fruit and dairyprices were steady or higher. Non-food inflation shed 0.1pptto 1.8%, while ex food and energy prices added 0.1ppt to1.9%. Overall services inflation was unchanged at 3.1%yr - thehighest rate since mid 2011. Separately, producer prices wereas anticipated, declining by 1.9% from a year ago in March, aslighter steeper rate of descent than the February reading.
More interestingly,
Phat Dragon
has noted a number ofemerging trends in the detail of the major non-food segments.Consumer durables price trends are showing little inclinationtowards inflation, indicative of excess capacity in manyindustrial sectors. The price of labour intensive services areshowing a relatively high sensitivity to the improvement indemand, consistent with a structurally tight labour market at thelow and semi skilled end; this is also evident in labour intensivemanufacturing (e.g. clothing). Those non-traded services pricesthat are not heavily administered - notably non-energy housingcosts - appear to be flattening out around 3% after a periodof one-way rises as real estate progressively disengaged itselffrom its policy induced trough. The authorities have loweredthe official 2013 CPI target to 3½% from the 4% of 2012.
Phat Dragon
sees that as a realistic figure, unlike the 2012 target,that was wildly conservative (Vale Baroness).
To change the subject completely, the new 20% capital gainstax to be levied on property vendors in the big three citiesis likely to have an unintended consequence. A disincentiveto sell implies that, all other things equal, the supply ofhousing available for sale will be diminished from what wouldotherwise have been the case. That will predictably amplifythe buy-and-hold-and-leave-untenanted problem that explainssome of the extraordinarily high valuation of the Beijing andShanghai housing stocks vis-a-vis average incomes. While
Phat Dragon
is certainly an advocate of tax reform with regard toreal estate, this is not what he had in mind. It is the
holding cost 
of property that needs to be altered, not necessarily the
transaction cost 
. The best policies assist with counter cyclicalmanagement while impacting incentive structures in a fashionthat pushes activity in a desirable longer run direction. Thereought to be two key goals here: sustainable fiscal policy andimprovements in housing affordability. Sustainable fiscal policyrequires a perpetual, reliable revenue stream from real estate.Improvements in housing affordability require that the effectivehousing supply is increased relative to demand. An annualtax on home ownership levied at the local level - equivalentin nature to council rates in the Anglosphere - would help onboth counts. It would increase the incentive to put tenants ininvestment properties to cover the cost, while providing anannuity like stream of revenue for fiscally constrained localgovernments. Such an initiative would also fit with the broadertheme of improving aggregate income distribution. The attemptto execute on their income distribution strategy - which cutsdeep into the very flesh of China’s political economy - will definethe legacy of the Xi-Li era.
9 April 2013
Westpac Institutional Banking Group Economic Research economics@westpac.com.au www.westpac.com.au
Quadrupling GDP per head from a $2k base
4567891005101520253035
ChinaJapanSouth KoreaTaiwanHong KongThailandSing.Malay.
per cent per annum Years Years to quadruple GDP/capita from $2k starting point (lhs)Compound annual growth rate in the period (rhs)
Income level per capita & its distribution
2030405060700 10 20 30 40 50 60
Sources: WestpacEconomics, WDI
Giniindex
PPPGDPper head
ChinaUSBrazilSouthAfrica
WealthyOECD
INR & IDRRussiaPolandChileMexicoMalaysia ThaiColombia
Stats of the week: China took 16 years to quadruple itsper capita income from a base of $2,000 per head. Japanachieved the feat in 17, South Korea and Taiwan in 20.
Chinese consumer prices
-10-50510152025-10-50510152025 Jan-01Jan-03Jan-05Jan-07Jan-09Jan-11Jan-13%yr TotalShelterClothingFoodHealth
Sources: CEIC, Westpac Economics.
%yr
Chinese CPI: the shelter component
-20-15-10-5051015-20-15-10-5051015 Jan-01Jan-03Jan-05Jan-07Jan-09Jan-11Jan-13%yr TotalBuilding costsRentPrivate housingUtilities
Sources: CEIC, Westpac Economics.
%yr
 
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