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ECONOMY: January Economy Report
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January Economy Report

By Andrew Smith

BT 201601 030 04 Economy Report 002After penning a series of rather gloomy economy reports over the last few months it is nice to have a few positive sign to highlight. Although 2015 was undoubtedly a relatively poor year the Chinese economy, towards the end of the year we started to see some signs that the slowdown had started to bottom out. According to the most recent data from the National Bureau of statistics (NBS), factory output grew by an annualised rate of 6.2 percent in November, which was much quicker than October's 5.6 percent. The figure came as quite a surprise to most analysts, who were previously expecting another month of 5.6 percent growth.

While the factory related data wasn't as exciting as retail and fixed-asset investment it certainly didn't send any shockwaves around the financial world, it does suggest a five month high and in terms of the macroeconomic situation, it may well indicate that policy measures to support growth have started to take a more serious effect. "Stimulus is gaining traction in stabilizing growth," Bloomberg Intelligence economists Fielding Chen and Tom Orlik wrote in a recent report. They argued however that in future "Stabilizing growth reduces the urgency for China's policy makers to add to their own stimulus measures". It will be interesting to see how the Chinese government and the central bank approach this area of the economy. Most commentators seem to think that there will be a continuation of looser monetary for some time to come, while Premier Li Keqiang recently pledged that his administration will step up reform on the so called "supply side" of the economy, for instance by aiming to tackle factory overcapacity and sift out zombie firms.

By far the two biggest problems the manufacturing sector seems to be facing at the moment are weak demand and overcapacity. The weakness of the demand side is definitely nothing new. For years now the Chinese manufacturing sector has borne the brunt of a stagnant European consumer market and persistent weakness in other major consumer markets. Unfortunately it doesn't look like that is going to change any time soon. On the other hand, there are some signs that Chinese firms could start to straighten out overcapacity issues in 2016. Policy measures, such as introducing tax cuts to the export sector in order to encourage firms to send more of their excess production abroad are certainly a step in the right direction in that regard.

BT 201601 030 01 Economy Report HighlightFixed-asset investment has long been one of the main drivers of the Chinese economy. The data shows that it rose by 10.2 percent in the first 11 months of 2015, unchanged from the gain in January-October, and higher than an expected 10.1 percent rise. Michael Thorpe, an analyst at Standard Chartered, has pointed out that "despite all of its shortcomings and its fall from grace over the past couple of years, China is still a very attractive destination for mid-long term investment". Moreover, he says that "there will still be a steady stream of fixed-asset investment [in China] for the foreseeable future, which will partially offset some of the slowdowns that are going on in other sectors of the economy".

It's fair to say that in recent months the Chinese retail sector has outperformed just about every other part of the economy. The latest figures suggest that this area is still going strong. In November retail sales grew by an annualised rate of 11.2 percent. This was the strongest expansion of the year. The figure was up from 11.0 percent growth in the previous month and beat analysts' median forecast of 11.1 percent. One of the biggest growth areas within this sector is of course the online sphere. Chinese internet shoppers are on a big spending spree at the moment. According to the National Bureau of Statistics, online sales grew by a staggering 34% from January to November 2015, totalling around 3.5 billion CNY.BT 201601 030 03 Economy Report 001

As Lynn Noah of online financial commentary blog Market Realist suggests, "A rise in retail sales shows that the Chinese economy is slowing as it transitions from an export-oriented to a consumer-driven economy. This transition is required because export orders are falling due to weak global demand. However, with the slowdown in Chinese local and foreign sales, an increase in retail sales becomes the bright spot in the Chinese economy".

The currency situation looks likely to remain a big talking point over the coming months. In the run up to the Federal Reserve's moderate but historically profound interest rate hike in December there was a big sell off of yuan. This hardly came as a surprise given that the People's Bank of China (PBoC) had supported a weakening of the 'red back' earlier in the year and speculators were always going to be banking on dollar appreciation when the time finally came for rates to start creeping back up to normal levels. The new yuan index will be composed of 13 currencies to "help bring about a shift in how the public and the market observe RMB exchange rate movements," CFETS said in a statement released late Friday.

BT 201601 030 02 Economy Report 003This loosening of the strong link to the dollar, which has climbed to the highest in more than a decade against major peers, would help support trade for China's export-dependent economy. The change "could end up being a significant shift in currency policy," Mark Williams, the chief China economist at Capital Economics Ltd. in London, wrote in a note. "The timing of this announcement is significant, on the cusp of tightening by the Fed, which could feed further dollar strength".

On a final note, it is worth mentioning the most recent inflation data. In November prices grew by 1.5 percent year on year, which although higher than the 1.3 percent increase most analysts expected certainly wasn't seen as ground breaking. The official target for 2015 was set at 3% early in the year, but with such a pronounced slowdown across the board it was always very likely to fall below the government's estimates. Going forward there are worries that China could be heading towards a deflationary environment. "China has entered a deflationary era," Liu Li-Gang and Louis Lam, economists at ANZ, wrote in a research note. "More alarmingly, the GDP deflator, a broader measure of price changes in the economy, declined 0.7 percent year on year in Q3, indicating that China has entered a deflationary era".

Furthermore, as Sue-Lin Wong from Reuters writes, "The risk that Chinese consumption might sink is not only a major risk for domestic policy makers but also for foreign firms who have invested heavily on the assumption that Chinese spending would help offset weak demand elsewhere". Although we probably shouldn't panic just yet, there is certainly plenty of reason for keeping a very close eye on inflation data in the coming months.


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