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ECONOMY: China Economy Report August 2013
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In the past month or so, most of the discussion on the Chinese economy has been focused specifically on the country’s policymakers. Following on from earlier reforms, the Beijing government is continuing to tackle the critical issues of structural reform and credit control.
The issue of public debt levels is a particularly big concern at the moment. Credit Suisse have estimated that the ratio of local government debt to GDP for 2012 was around 36%, whilst analysts at Fitch, the credit rating agency which downgraded China in April, gave a more conservative 25% figure. In any case, there is clearly a need for the government to address the current credit situation. With the backdrop of slowing economic growth and poor external demand persisting, policymakers in China are going to have some tough choices to make over the next few months. 

Key PMI data suspension raises questions over growth
It emerged in early July that Chinese authorities have suspended the release of important PMI data by the National Bureau of Statistics. Cai Jin, vice president of the China Federation of Logistics & Purchasing, gave the reason that his organisation “now have 3,000 samples in the survey, and from a technical point of view, time is very limited. There are many industries, you know”. He also argued that the failure to release these figures on time was due to temporary analysis-related problems and is not an attempt to hide the bleak economic circumstances which this data may well have confirmed.
Regardless of whether or not the statistics are released at some point, serious questions about the state of the economy will remain. After the National Bureau of Statistics failed to release the PMI data in July, Helen Yuan, a reporter from Bloomberg, pointed out that “less information makes it more difficult to assess the magnitude of an economic slowdown which could be at risk of deepening because of a cash squeeze in the interbank market that sent borrowing costs soaring last month. The issues with trade data this year added to broader scepticism of the nation’s statistics”. According to this report, “economists in a May survey by Bloomberg News said that January-April export growth was overstated by 4 to 13 percentage points, while Bank of America Corp. estimated the trade surplus for the period was one-tenth of the official figure”.
PMI manufacturing figures for June showed that the sector, which continues to be plagued by weak external demand, was worsening:
Analysts will definitely be hoping that the data for July paints a better picture.
The ‘great Chinese credit cut off’ continues
In a bid to rebalance the economy and restore confidence in the sustainability of China’s growth, the government is becoming ever more stringent in its management of credit markets. A number of key cabinet members, including Premier Li Keqiang and President Xi Jinping, have insisted for a long time now that there is a need to limit the amount of easy credit which has been floating around the Chinese banking system since the onset of the 2008 global financial crisis.
According to a statement made by the State Council, "the government will adopt differentiated policies based on the varied situations in the industries plagued by overcapacity". Ma Tao, an analyst with CEBM Group, told Reuters that commodity related sectors and many manufacturing firms are currently being crippled by huge debts and overcapacity. He claimed that "the recent credit crunch also served as a catalyst for their cash flow problems to emerge as liquidity has not been eased".
Amongst the major risks to China’s economy are the so called ‘shadow baking sector’ and the speculative real estate environment; both of which are largely the result of the central bank’s easy money policies of recent years. Chinese business leaders, many of whom have been dependent on support from the central authorities in recent times, are becoming increasingly worried about the government’s deliberate tightening of credit. 
But not all analysts are so pessimistic about the credit situation. Jing Ulrich, chairperson of global markets at JPMorgan Chase & Co, said in a recent interview that “since the interest rate spike in the third week of June, the liquidity situation has improved somewhat”. She argues, however, that going forward “Chinese businesses need to be more disciplined in terms of managing risks and lending because the liquidity situation in China will probably be quite tight for the next few months”.
Inflation and property prices seemingly more stable
What is encouraging for both policymakers and consumers in China is the fact that both consumer-based inflation and the property markets are fairly stable at the moment. Although inflation did spike in June to 2.7%, analysts are broadly optimistic for the latter half of 2013. Food prices were again seen as the biggest area in which prices rose significantly. According to official figures, food prices were up 4.9% in June, significantly higher than the 3.2% year-on-year rise posted in May. With regards to policy aspects of inflation going forward, most commentators are dismissing the possibility that the current rates are could lead to price controls or even an interest rate hike. Bank of America Merrill Lynch economists Lu Ting and Zhi Xiaojia told the BBC that they expect authorities to keep monetary policy neutral with "neither easing nor tightening".
However, not all analysts see the price stability continuing through the second half of the year. Economists at Barclays are expecting inflation to pick up and in turn a rates hike at some point in the near future. Jian Chang, an analyst for Barclays in Hong Kong “We think the central bank is likely weighing the benefits and costs of a benchmark rate cut, which we believe is increasingly likely given weak economic growth”.
In a recent survey from the China Real Estate Index System (CREIS), property price inflation for the 100 biggest cities grew at a more moderate year-on-year rate of 0.8% in June. A spokesperson from the organisation said that "against the backdrop of rising uncertainties in the economy and strained liquidity conditions, home price gains continued to cool slightly due to increasing supply in several cities”.
If it persists, this low inflationary setting and seemingly stabilising real estate sector would be great for the country’s central bank in the increasingly unlikely event that an interest rate cut was needed to stimulate the economy.

by Tracy Hall
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