Phat dragon

26 April 2012

# 102

a weekly chronicle of the Chinese economy

With a relatively quiet data week underway, Phat Dragon feels

that a quick summary of central government finances is in order. The first obvious point is that total revenue growth has slowed considerably as of Q1. It is now growing at just 10.3%yr, down from 22.1% a year ago. The major weakness has come through the VAT (5.4%, a 17.5ppt drop from 2011Q1); personal income tax (6.2%yr, partially reflecting an increase in the tax free threshold); and from a range of indirect taxes that mirror economic activity. Corporate income tax has held up better, but it too has slowed to 20.5% from the high 20% area a year ago. With industrial profits opening the year in negative territory, corporate tax revenues will be under pressure in coming quarters.

Industrial profits & central revenues

36 30 24 18 12 6 0 Jun-00
Revenue growth (lhs) Profits (rhs, smoothed)

%yr
Sources: CEIC, Westpac

%yr

80 60 40 20 0 -20

The flash estimate of the April HSBC manufacturing PMI rose

to 49.1 versus 47.3 in March. Phat Dragon notes that he has been forced to elevate this series above the official NBS index due to the seasonal adjustment issues with the latter, despite its obvious shortcomings, namely a small sample weighted too heavily towards private exporters. While the headline did improve in a material way in April, the following is worth noting. 1) The level of the index is still below 50. 2) The level of the index is ~8% below its long run average. 3) The level of the index is below its December 2011 level. 4) Finished goods inventories moved back above 50. 5) The new orders to inventory ratio declined and remains below unity, indicating there will be no short term take-off in the headline reading. This release should temper expectations that the June quarter will be considerably better than Q1 and we feel that on many indicators y-o-y growth rates are just as likely to fall as to stabilise in Q2. Phat Dragons view is that analysts that were caught out by the degree of weakness in Q1 have been too quick to claim it was the bottom, principally citing the March credit figures. While Phat Dragon was very pleased indeed to see credit begin to flow again, it is naive to expect the economy to pick up instantaneously. 200,000 or so Chinese suppliers and foreign product sourcers - opened a little over a week ago. Last year sales concluded at Canton approached $US75 billion (about 4% of annual exports), but sales were up just 8.1% from 2010 and the number of buyers rose just 2.9%, an early sign that all was not well in the international economy. This year Phat Dragon notes that the chat is all about declining margins, price competition and weak demand from Europe and North America. While it doesnt seem to have noted by the media, besides the mandatory stopover at the Hannover swap meet, Phat Dragon notes that his itinerary studiously avoided any non-German EMU countries, instead tracing an arc from Sweden to emerging Eastern Europe. Curious, no?

Jun-02

Jun-04

Jun-06

Jun-08

Jun-10

-40 Jun-12

Central government VAT & IVA

45 %yr
Sources: CEIC, Westpac. 3mma.

%yr

45

30

30

15

15

0
VAT revenues IVA

-15 Jan-97

-15 Jan-06 Jan-09 Jan-12

Jan-00

Jan-03

The Canton spring trade fair - a giant marketplace for some

Chinas manufacturing PMI: Markit-HSBC

65 60 55 50
Headline (lhs)

index

index

1.5

1.0
New orders (lhs) Production (lhs) New orders to inventory ratio (rhs)
Sources: Markit, Westpac Economics.

45 40

While on trade fairs, Premier Wen was in Europe this week.

35 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

0.5

In the latest step in the global war to secure the Chinese education
dollar, Phat Dragon notes that one of Australias leading universities has announced that it will accept applications from prospective undergraduates directly following their completion of
Economic Research

the Gaokao entrance exam at tier 1 level, rather than requiring foundation studies to be completed at home first - subject to English competency of course.

Stats of the week: The China-Mongolia land border is the

economics@westpac.com.au www.westpac.com.au

worlds 4th longest. #1 US-Can; #2 Rus-Kazakh; #3 Arg-Chi.

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