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ECONOMY: Chinese Economy Report January
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Chinese domestic economy shows signs of improvement
Chinese industrial output and retail sales in November rose at the fastest annual pace in the past eight months- increasing hopes that the world’s second-biggest economy is finally rebounding after a long decline. 
 
Industrial-production growth rose 10.1 percent, up from 9.6 percent in October and compared with the 9.8 percent median estimate of analysts in a Bloomberg survey. Electricity output rose 7.9 percent, the strongest since December 2011.
 
China’s fixed-asset investment, excluding rural households, in the first 11 months of the year rose 20.7 percent, the same pace as in the January-October period.
 
Annual growth in retail sales hit 14.9 percent, the strongest since March, while the pace of fixed asset investment, or spending in such areas as bridges, factories and housing, was steady at 20.7 percent in the first 11 months.
  
Caterpillar Inc., the world’s biggest construction and mining equipment maker, is seeing signs of recovery in China and expects economic growth to increase next year as the government focuses on rural migration to towns and cities, Chairman and Chief Executive Officer Doug Oberhelman said in an interview with Bloomberg Television on Thursday 6 December. 
 
External demand still remains sluggish
Despite the fact that the Chinese domestic economy is improving, the major global importers of Chinese products are still struggling: Europe and Japan are going through prolonged economic recession and the US is experiencing a very sluggish recovery. 
 
China's annual exports growth in November fell to a 2.9 percent year-on-year increase and behind October's 11.6 percent pace, customs announced on Monday 10 December. 
 
"The external sector remains fragile, although recent manufacturing activities have shown convincing signs of stabilisation and a gradual recovery," said Connie Tse, an economist at Forecast Pte in Singapore.
 
"I expect export growth to pick-up throughout 2013, but this is likely to be gradual and volatile in the absence of a material improvement in the euro zone," said Tse. 
 
Imports were unchanged on the year, off forecasts for a 2.0 percent rise. The relatively subdued reading masked a surge in imports of crude oil, iron ore and copper that analysts said backed the view that domestic activity was picking up, according to Reuters. 
 
"The export slowdown shows that external demand faces uncertainty due to concerns over the 'fiscal cliff' in the U.S.," said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.
 
"Nevertheless it does not change our view that growth is on track for a strong recovery in Q4, as (growth) is mostly domestically driven," said Zhang. 
 
In the United States, scheduled tax increases and public spending cuts due to kick in early in 2013 could suck $600 billion out of the economy, raising fears that a recession could follow unless Congress acts, according to Reuters. 
 
Inflation remains low and expected to continue to stay low in 2013 
Consumer inflation rose by 2 per cent in November from a year earlier compared with 1.7 percent increase in October. Producer prices fell 2.2 percent, the ninth straight drop, while the pace of the decline moderated for a second month.
 
This marks the 10th straight month below the government’s 2012 target of 4 percent. Rising prices is the biggest long-term risk identified by the central bank as China moves from a centrally planned to a market-based economy. Low inflation rates provide sufficient room for regulators to stimulate the economy through monetary and fiscal policy in 2013. 
 
Real economic growth or fiscal illusion?
“There isn’t any improvement in the real economy, it’s all because of the fiscal stimulus,” says Bloomberg economist Michael McDonough. The growth is not coming from export sector and domestic consumption is not helping either. The state spending on infrastructure projects are leading the domestic rebound, according to McDonough.  
 
Unlike the stimulus following the Lehman Brothers bankruptcy in 2008, when banks threw money at state-owned companies, this time the spending is more targeted at infrastructure projects, especially trains and subways, according to Bloomberg. 
 
In October, the Railways Ministry announced that it would increase its spending target for the year by CNY 630 billion. That was the second increase in 2012, following an earlier announcement in July. The original target for 2012 was from CNY 411.3 billion. Investment had slowed in 2011 following a corruption scandal involving the railways minister, as well as a fatal crash on one of the China’s new high-speed train lines.
 
Now that the government is again ramping up investment in rail, the spending is spreading throughout the country. For instance, on 26 November the government announced that it had approved a CNY 25.7 billion rail project for the south eastern province of Fujian and a CNY 31.2 billion project in Urumqi, the capital of the Xinjiang region in the far west of the country. Guangdong province in southern China also plans on spending more than CNY 1 trillion on rail and other transportation projects between 2011 and 2015, the government announced on 16 November. That’s more than double of what the province spent in the five years ending in 2010. 
 
As Beijing is selectively pumping money into infrastructure projects, it is important to note that the growth is based on fiscal stimulus rather than real growth. This type of government initiated stimulus plan on economic growth is not sustainable once the investment does not return guaranteed economic value and benefit to the rest of the Chinese economy.
 
Five mega-trends that foreigners should understand going into 2013. 
There is a long list of industries that can benefit from China’s major economic reform. As Beijing tries to narrow China’s income gap in the next decade, Chinese consumption levels will go up and the CNY is likely to appreciate against the USD. Foreign businesses can benefit from these five mega-trends: real estate, natural resources, education, health care and tourism. 
 
Following from the real-estate column published last month, there are enormous opportunities within the natural resource sector. China's growing consumption has helped push the price of all manner of fuels, metals and grains to new peaks over the past few years. 
 
As Chinese consumption volume and spending habits change, entrepreneurs and investors around the world can benefit from opportunities arising from these trends. 
For example, Nebraska, a landlocked state in the middle of the US, has never felt closer to China. As more and more of the state’s crops are shipped across the Pacific to meet Chinese demand, Nebraska is on the front line of a structural shift in global grain markets as China is importing more cereals than ever before according to Financial Times report. Nebraska’s crop exports to China have doubled over the past five years alone. 
 
Nebraska is not alone in noticing the trend. From Chinese officials to global commodities trading house executives, the industry has started to acknowledge and take advantage of China’s structural shift in becoming a net importer of grains. 
 
Until recently, China only imported small amounts of premium-grade rice, minor quantities of wheat and almost no corn, insisting on self-sufficiency. But that is changing. Already the world’s biggest importer of soybeans, China is now adding cereals such as corn, wheat, barley and rice to its shopping list. The shift could have profound implications for global food markets because China’s total demand for grains is vast relative to the size of globally traded markets according to the Financial Times. 
 
“For China to lose even a little bit of self-sufficiency means a lot on the trade front,” says Jean-Yves Chow, analyst at Rabobank, one of the largest lenders to the agribusiness industry. “Even if China imports 5 per cent of their corn, that is equivalent to one third or one half of the corn trade in the world.”
 
As more Chinese people move to cities and rural parts of the country, the consumption of meat increases the requirement for more animal feed crops. The shift has added to the strain on China’s agricultural sector, which is already trying to feed one-fifth of the world’s population with scarce farmland and water.
 
Chinese grain imports have already tripled so far this year, rising to 13.4m tonnes from January to November, up from 4.5m tonnes during the same period of 2011. The buying spree has made Beijing the world’s second-largest importer of rice and barley, a top 10 buyer of corn and a top 20 of wheat, according to Financial Times. 
 
Since Chinese agricultural demand started to soar as the economy was developing, Beijing has injected billions of dollars into its agricultural sector to maintain self-sufficiency in three key crops: corn, rice and wheat. 
 
Chen Xiwen, a top Chinese agricultural official, recently acknowledged that higher imports of grains and oilseeds would be inevitable. “Making full use of international resources and international markets has become very necessary,” he said at a conference in Beijing. “China’s agricultural output has been rising, but demand has been increasing even faster.”
 
As Chinese natural resource appetite grows exponentially beyond its self-sufficiency level, there are many potential risks. As Chinese spending power increases, it will create conflicts with neighbouring countries over control of the natural resources. 
 
“If we take the South China Sea as an example, we can see that oil companies, maritime surveillance authorities and even the military are exerting influence over China’s foreign policy there,” says Zhu Feng, a professor of international relations at Peking University.
 
 
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