Home  Contact Us
  Follow Us On:
 
Search:
Advertising Advertising Free Newsletter Free E-Newsletter
Magazine
  
      2018       2017       2016       2015       2014       2013       2012       2011       2010       2009       2008

ECONOMY: Monthly Economy Report
Share to

Economy Report

By Andrew Smith


BT 201504 41 Economy 1In March all eyes were on Chinese Premier Li Keqiang as he confirmed what many analysts had predicted – a GDP growth target of 7 percent for 2015. At the annual National People's Congress Li laid out his vision for the coming year. Amongst other things, he emphasised the need for structural reform which would revitalise the nation's economy. He also expressed his view with agreement to financial analysts that the current rates of growth are the "new normal". This will be much slower than previous decades but there seems to be a broad consensus that by shifting the focus towards improving people's quality of life and instituting a more sustainable economic model in the long term is the right way to go.


We are always hearing about the economic transformation but there are very few real signs that it is happening at a decent pace. The New York Times recently published an enlightening article about how China's traditional strengths are turning into weaknesses. Their reporter, Neil Gough, pointed out that "China has far more steel mills than it needs, a problem made worse by the country's shrinking housing market, the most voracious consumer of the metal. Companies have scaled back or closed, as domestic steel prices have collapsed". "With scant demand at home", he says "the remaining mills have looked beyond their borders for business. China shipped a record 100 million metric tons of steel overseas in the 12 months ended in February, a 55 percent increase from the previous year". The export-orientated model is widely considered to be outdated and in need of a drastic change. By encouraging more demand the government hopes to grow the economy in a way that relies far less on investment and selling cheap goods to foreign consumers. To do that though there will have to be a serious reform agenda, sooner rather than later.

BT 201504 40 Economy HLIn the meantime all the key indicators are showing a slowdown. The latest figures show that industrial production grew by 6.8 percent in the first two months of the year, which makes it the slowest quarterly growth since the darkest days of the global financial crisis. According to data from the National Bureau of Statistics, retail sales grew by 10.7 percent in the first two months of the year. Analysts had widely predicted an 11.7 percent rise from a year before. Industrial output was also a percentage point below expectation, growing at 6.8 percent from a year before rather than 7.8 percent. Fixed asset investment, which is a crucial driver of growth in the Chinese economy, grew by 13.9 percent. The consensus was that a 15 percent would have been satisfactory.


BT 201504 42 Economy 3Some commentators are suggesting that the recent moves to stimulate faster growth need to be stepped up a notch. Donna Kwok, senior China economist at UBS, said that "What we actually need to see is a further interest rate cut, of which we're expecting one or two more this year just to keep down real financing cost in the economy. And to counter the ongoing capital outflows, we also need further liquidity provisioning; and to do that, the PBOC can also provide RRR cuts, we're expecting at least two more this year to counter and keep base money supply stable".


Another rate cut, perhaps in the next quarter, seems highly likely given that inflation is historically at a very low level. At the end of last year inflation was growing so slowly that people were starting to worry about a devastating deflationary cycle. However, the most recent figures suggest that inflation is around 1.4 percent. This is a more welcomed number than the 0.8 percent growth we saw in January. In part this can be attributed to the Spring Festival celebrations which normal cause a brief surge in consumer demand. In Premier Li's speech he mentioned that the inflation target for this year had been lowered from 3.5 percent to just 3 percent, but it still seems unlikely that to reach those levels given the weakening fundamentals in the economy as a whole.


BT 201504 42 Economy 3The other big talking point this month has been jobs. Due to the staggering growth of the Chinese economy in recent years, analysts have generally focused much less on unemployment in China than they have in the U.S. and European job markets. Nevertheless it is an increasingly important gauge of economic activity. Premier Li stressed that the government were very keen to maintain the unemployment rate of 4.5 percent. To do that would require 10 million more jobs to be created. If GDP growth stays at around 7 percent that shouldn't be too much of a tall order but it will depend on whether certain key sectors of the economy continue to contract like they have been doing. One encouraging sign in this regard is that there is plenty of cash flowing into start-up companies at the moment. The BBC's Linda Yeuh points out that "Newly rich Chinese and overseas investors were piling into China aiming to fund the recent spurt of start-ups. Some even said that venture capitalists can support property companies, although a prominent venture capitalist told me that wasn't allowed. The reliance on cheap cash to keep the property sector afloat has a worryingly familiar ring. However, there also appear to be more entrepreneurs too, and the Chinese government will hope that these will be a greater force in the economy than the overhang of debt from the old growth driver. That's why the employment figures in China are the key ones to watch for".


The manufacturing sector has traditionally been the main driver of low unemployment in China. Now the key focus is creating new jobs in the service sector. This goes back to the broader trend of a move towards a more domestic consumption-based model. Of course promoting job creation in high-value areas of the economy is no easy task. It will be interesting to see what the authorities do to encourage the private sector to employ more people. At the moment there is simply too much burden on the public sector and too much of a reliance on borrowing, investment and exporting.


---END---

    Subscription    |     Advertising    |     Contact Us    |
Address: Magnetic Plaza, Building A4, 6th Floor, Binshui Xi Dao.
Nankai District. 300381 TIANJIN. PR CHINA
Tel: +86 22 23917700
E-mail: webmaster@businesstianjin.com
Copyright 2018 BusinessTianjin.com. All rights reserved.