Lawrence Klein Nov 0905

Sustainability of China’s Economic Expansion Lawrence R. Klein November 9, 2005

Chinese Current Quarter Model • China follows step-by-step economic reform: gradualism, with a Chinese flavor • Our model forecasts GDP, CPI, and PPI, 2 quarters ahead, on a bi-weekly basis, top-down mode, on supply side, demand side, and market clearing • We have been forecasting for more than a year, and our forecasts indicate that China’s gradual movements are plausible • For the future, we are studying bottom-up mode

Chinese GDP Forecast List of 29 Monthly Indicators (Page 1/2) • • • • • • • • • • • • • •

Imports - Aluminum (Tons) Central Bank Benchmark Interest Rate, Reserve Requirements (Percent per annum) Industrial Production - Cement (Millions of Tons) Commercial Buildings, Under Construction (Thousands of Square Meters) Imports - Copper (Tons) Exports - Cotton Yarn (Tons) Imports - Crude Petroleum Oil (Thousands of Tons) Industrial Production - Total Energy Production (Millions of Tons) Ratio of Utilized FDI to GDP Industrial Production - Chemical Fertilizer (Thousands of Tons) Industrial Production - Garments (Millions of Pieces) Ratio of Government Expenditure to GDP Ratio of Industrial Sales to GDP Industrial Production - Iron Ore (Thousands of Tons)

Chinese GDP Forecast List of 29 Monthly Indicators (Page 2/2) • • • • • • • • • • • • • • •

Exports - Live Pigs (Thousands) Industrial Production - Plastic Products (Thousands of Tons) Exports - Plastic Articles (Tons) Exports - Live Poultry (Thousands) Industrial Production - Power Generated (Billions of Kilowatt-hours) Real Retail Sales, Consumer Goods - Total (Billions of Yuan) Imports - Refined Petroleum Products (Thousands of Tons) Ratio of Fixed Assets Investment to GDP Imports - Steel Products (Thousands of Tons) Industrial Production - Steel (Thousands of Tons) Exports - Sugar (Tons) Exports - Tea (Tons) Exports - Vegetables (Thousands of Tons) Relative Wage Rate between China (numerator) and US (Percent Change from a Year Earlier) Velocity, based on M2 (Percent Change from a Year Earlier)

Chinese CPI Forecast List of 33 Monthly Indicators (Page 1/2) • • • • • • • • • • • • • • • •

Import Price - Aluminum (US Dollars per Metric Ton) Export Price - Aquatic Products (US Dollars per Metric Ton) Import Price - Motor Vehicles and Chassis (US Dollars per Unit) Export Price - Coal (US Dollars per Metric Ton) Import Price - Copper (US Dollars per Metric Ton) Export Price - Cotton Yarn (US Dollars per Metric Ton) Import Price - Petroleum Oil (US Dollars per Metric Ton) Household Savings Deposits Rate - Demand (Percent per annum) Import Price - Cotton Woven Fabrics (US Dollars per Meter) Signed FDI, year-to-date (Millions of US Dollars) Import Price - Fertilizers (US Dollars per Metric Ton) Import Price - Synthetic Fibers for Spinning (US Dollars per Metric Ton) Monthly Income per Capita - 35 Cities Average (Yuan) State-Owned Fixed Asset Investment (Millions of Yuan) Import Price - Iron Ore and Concentrates (US Dollars per Metric Ton) Money Supply M1 (Billions of Yuan)

Chinese CPI Forecast List of 33 Monthly Indicators (Page 2/2) • • • • • • • • • • • • • • • • •

Export Price - Edible Oil Seeds, Peanuts (US Dollars per Metric Ton) Import Price - Refined Petroleum Products (US Dollars per Metric Ton) Export Price - Live Pigs (US Dollars per Unit) Export Price - Plastic Articles (US Dollars per Metric Ton) Export Price - Live Poultry (US Dollars per Unit) Real Estate Price Index Price Index of Rice Import Price - Synthetic Rubber (US Dollars per Metric Ton) Export Price - Raw Silk (US Dollars per Metric Ton) Export Price - Edible Oil Seeds, Soybean (US Dollars per Metric Ton) Import Price - Steel Products (US Dollars per Metric Ton) Export Price - Sugar (US Dollars per Metric Ton) Export Price - Tea (US Dollars per Metric Ton) Import Price - TV Sets, Including CKD and SKD (US Dollars per Unit) Import Price - Edible Vegetable Oil (US Dollars per Metric Ton) Import Price - Cereals and Cereal Flour, Wheat (US Dollars per Metric Ton) Import Price - Woven Fabrics of Synthetic Yarn (US Dollars per Meter)

Chinese PPI Forecast List of 32 Monthly Indicators (Page 1/2) • • • • • • • • • • • • • • • •

Brent Spot Price (US Dollars per Barrel) Base Metal Price Index (1985=100, includes aluminum, copper, lead, nickel, tin and zinc) Import Price - Cereals and Cereal Flour (US Dollars per Ton) Import Price - Edible Vegetable Oils (US Dollars per Ton) Import Price - Sugar (US Dollars per Ton) Import Price - Synthetic Rubber (US Dollars per Ton) Import Price - Wood in the Rough (US Dollars per Cubic meter) Import Price - Synthetic Fibers for Spinning (US Dollars per Ton) Import Price - Iron Ore and Concentrates (US Dollars per Ton) Import Price - Refined Petroleum Products (US Dollars per Ton) Import Price - Fertilizers (US Dollars per Ton) Import Price - Plastics in Primary Forms (US Dollars per Ton) Import Price - Cotton Woven Fabrics (US Dollars per Meter) Import Price - Steel Products (US Dollars per Ton) Export Price - Live Pigs (US Dollars per Unit) Export Price - Live Poultry (US Dollars per Unit)

Chinese PPI Forecast List of 32 Monthly Indicators (Page 2/2) • Export Price - Tea (US Dollars per Ton) • Export Price - Coal (US Dollars per Ton) Purchasing Price Index, Building Materials and Non Ferrous Metal Minerals (Past Year = 100) • Purchasing Price Index, Chemical Materials (Past Year = 100) • Purchasing Price Index, Ferrous Metal Materials (Past Year = 100) • Purchasing Price Index, Fuels and Power (Past Year = 100) • Purchasing Price Index, Non Ferrous Metal Materials & Electric Wire (Past Year = 100) • Purchasing Price Index, Timber and Paper Pulp (Past Year = 100) • Value Added of Industry (Billions of Yuan) • Industrial Sales (Billions of Yuan) • Government Expenditure - Capital Construction (Billions of Yuan) • Real Estate Investment, year-to-date, Office Buildings (Millions of Yuan) • Real Estate Investment, year-to-date, Commercial Buildings (Millions of Yuan) • Commercial Buildings, Sales, year-to-date, Total (Millions of Yuan) • State-Owned Fixed Assets Investment (Millions of Yuan) • Signed FDI, year-to-date (Millions of US Dollars)

China Current Quarter Model (CQM) Treatment of Special Factors GDP • We consider the impact of the SARS epidemic, the elimination of the WTO textile quota, and the possibility of the Avian flu incidence.

CPI • We consider the impact of Chinese New Year date on consumer prices.

The SARS Epidemic 110.5

98

110.0

96

109.5

94

109.0

92

108.5

90

108.0

88

107.5

86

107.0

84

02

03

04

05

GDP (left scale, %, year-to-date over year-to-date a year ago) Consumer Confidence Survey Index (right scale)

The Elimination of the WTO Textile Quota Chinese Exports of Textile Products (Billions of US Dollars, no seasonal adjustment) 9 8 7 6 5 4 3 2 1 0 1999

2000

2001

2002

2003

Apparels and Clothing Accessories

2004

2005 Footw ear

The Relaxation of the Dollar Peg Exchange Rate (Chinese Yuan per US Dollar) 8.115 8.110 8.105 8.100 8.095 8.090 8.085 8.080 7/22

8/5

8/19

9/2

9/16 9/30 10/14 10/28

China CQM Latest Forecast 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1

GDP 109.4 109.5 109.4 109.4 109.2

CPI 102.8 101.7 101.3 100.9 100.7

PPI 105.6 105.6 105.0 103.7 103.1

Actual Actual Actual Forecast Forecast

China CQM Latest Forecast (2005Q4 – 2006Q1) Gross Domestic Product

(Year-to-Date, Year-over-Year Index) 110.0 Forecast

109.5 109.0 108.5 108.0 107.5 107.0 2000

2001

2002

2003

2004

2005

2006

China CQM Latest Forecast (2005Q4 – 2006Q1) Consumer Price Index (Year-over-Year Index) 106 105 104 103 102 101 100 99 98 2000

Chinese New Year Price Spike

Forecast

2001

2002

2003

2004

2005

2006

China CQM Latest Forecast (2005Q4 – 2006Q1) Producer Price Index (Year-over-Year Index) 109 107 105 103 101

Forecast

99 97 95 2000

2001

2002

2003

2004

2005

2006

China CQM Track Record GDP (YTD, year- over-year index)

Initial Official Figure

Revised Official Figure

CQM Forecast Figure

CQM Forecast Month

2004Q4

109.5

109.5

109.5 109.7

December 04 January 05

2005Q1

109.5

109.4

108.8 108.9 109.2 108.3 108.7

December 04 January 05 February 05 March 05 April 05

2005Q2

109.5

109.5

108.9 108.9 108.5 109.5 109.7 109.5 109.6

January 05 February 05 March 05 April 05 May 05 June 05 July 05

2005Q3

109.4

109.3 109.4 109.2 109.4 109.3 109.6 109.6

April 05 May 05 June 05 July 05 August 05 September 05 October 05

China CQM Track Record Initial Official Figure CPI (Year-overyear index)

Revised Official Figure

CQM Forecast Figure

CQM Forecast Month

2004Q4

103.2

102.9 102.8

December 04 January 05

2005Q1

102.8

100.7 101.4 101.8 103.2 102.7

December 04 January 05 February 05 March 05 April 05

2005Q2

101.7

100.5 100.7 102.4 101.5 101.2 101.7 101.6

January 05 February 05 March 05 April 05 May 05 June 05 July 05

2005Q3

101.3

100.1 100.1 100.4 101.4 101.7 101.4 101.4

April 05 May 05 June 05 July 05 August 05 September 05 October 05

China CQM Track Record Initial Official Figure PPI (Year-overyear index)

Revised Official Figure

CQM Forecast Figure

CQM Forecast Month

2004Q4

107.9

107.5 107.7

December 04 January 05

2005Q1

105.6

106.0 105.7 104.9 105.3 105.3

December 04 January 05 February 05 March 05 April 05

2005Q2

105.6

103.4 102.4 103.4 104.3 105.0 105.6 105.6

January 05 February 05 March 05 April 05 May 05 June 05 July 05

2005Q3

105.0

102.6 104.2 103.9 104.4 104.7 105.1 105.1

April 05 May 05 June 05 July 05 August 05 September 05 October 05