China: Recovery Consolidating but Slower Growth Ahead

Rising labor costs, a slowing recovery in the advanced economies, and expected reductions in China’s dependence on external demand will probably slow China’s growth to 7–8 percent in the years ahead. A significant slowdown, as feared for the United States, is unlikely, however. If domestic economic rebalancing—now recognized by top leaders in Beijing as absolutely necessary—accompanies this slowdown, it will be a good thing for China and for the rest of the world.

Overheating Largely Contained

China’s efforts to reduce overheating and control a potentially dangerous housing bubble have been largely successful so far. Although consumer price index (CPI) inflation, driven by food prices, grew in August, producer price inflation fell. In light of a probable decline in food prices later this year, the government’s 3 percent CPI inflation target for 2010 looks achievable.

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Baidu: Expecting Strong Q2 Results, Slower Q3 Growth

Expecting strong Q2 results. Chinese search engine operator Baidu (BIDU) will report 2Q10 results on July 21 after market close. For the quarter, I estimate Baidu generated $280 million revenue (up 48% Q/Q) and $0.33 GAAP EPS, significantly above management guidance of $268.1-274.0 million and consensus of $271.4 million. I attribute the strong growth in Q2 to three factors: advertisers ramping up spending after Chinese New Year, Baidu gaining market share after Google (GOOG) exited China mainland in late March, Phoenix Nest system achieving higher penetration among Baidu's advertising clients.

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