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ECONOMY: Monthly Economy Report
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Economy Report

By Andrew Smith

BT 201502 45 Economy 6e0917469214d8fbd8c517dcdc6b8dcf china pmi coverAs the announcement of GDP growth targets for this year approaches, analysts are wondering whether the country will have met its official target for 2014. A Wall Street Journal survey of 14 world leading economists found a median prediction of 7.25% GDP growth last year. If that turns out to be true then it will fall short of the government's rather ambitious target of 7.5%. It would be the first time China's annual GDP growth rate has missed official targets since the Asian Financial Crisis at the end of last century. Insiders are suggesting that the government's growth target for this year will be more modest. The consensus is that the authorities will aim for around 7% growth in 2014 but we will have to wait and see.

The impact of a Chinese slowdown on the global economy as a whole is becoming increasingly apparent. In late 2014 China overtook the United States as the world's largest economy on a PPP (Purchasing Power Parity) basis, according to the IMF. While that figure is still open to debate it is beyond doubt that China is most important importer of commodities and has been the main contributor to global growth for quite some time. China's imports last year were up by just 0.4% from a year earlier, according to the latest figures published in Xinhua. Not surprisingly this makes its slowdown a risk for everyone from Australian miners to emerging market exporters. We are likely to see a significant knock on effect in these countries if the Chinese economy and imports do continue to slowdown. Julian Evans-Pritchard, a global economist at Capital Economics, recently said that "as such, import growth is likely to remain weak. We think that domestic demand, particularly for commodities, is likely to remain subdued and that those anticipating a stimulus driven pick-up in investment or a marked turnaround in the property sector will be disappointed".

BT 201502 43 Economy hlThis broad slowdown comes at an important time for the Chinese economy. As Tao Wang, chief economist at Swiss bank UBS, points out "for 2015 we can expect a slow grind and persistent economic difficulties will likely increase the pressure for faster reforms". The Chinese government's main mission over the course of the year is to continue facilitating the country's transition away from manufacturing, exports and investment towards a more consumer demand-driven model. It is unclear whether the current situation is a result of the action they have taken too burst the housing bubble and gain control of the dire credit market, or a secular downturn in China's crucial manufacturing sector. Factory output in particular has been a cause for concern in recent months. Towards the end of last year HSBC's PMI index indicated a slowing of output from 50.3 in November to 50.1 in December. If the decline continues and drops below the 50 mark then it will signal a contract in the manufacturing sector. Many commentators see this as inevitable. Zhao Qinghe of the Chinese Statistics Bureau acknowledged that "The manufacturing industry faces relatively severe difficulties and pressure". This includes, amongst other things, an increase in wages and costs, as well as a stronger yuan.

It is clear that there are still plenty of risks in 2015. According to leading Asia Pacific economist Claire Howarth, "China's challenge is to deal with zombie producers, high debt levels and bad loans without sparking a financial crisis. These tests mean GDP growth will slip below 7 per cent this year, well under the previous decade's 10 per cent average". Although they lowered benchmark rates in late 2014 the central bank has largely resisted intervening in a big way to spur on growth through lending. The housing market bubble also seems to have been tamed, for now at least, but it will remain a threat for the foreseeable future. Excesses still exist in key areas and shadow banking practices are still rife. Throw a big global shock into the mix and it doesn't bode all that well for the Chinese economy.

BT 201502 46 Economy 102027261 185179102.1910x1000It wasn't all bad news though - particularly for consumers and the People's Bank of China. Inflation remains very low. This is partially reflective of the slowdown in credit and real estate price growth, but it is obviously being driven by the global slump in commodity prices. While ever crude oil stays at around 50 USD per barrel the Chinese will certainly be happy. The strengthening of the dollar has led to a broad appreciation of the RMB, which is also giving consumers and importers of raw commodities a boost in spending power. With the commodity super cycle on its last legs, now might well be a good time for the Chinese to stock up on industrial metals and crude. Whether they will or not remains to be seen but we certainly can't expect a big infrastructural stimulus to on the same magnitude as the one we saw after the 2008 global financial crisis.

BT 201502 44 Economy chinas manufacturing sector deceleratesExport and trade surplus data for the fourth quarter was also fairly encouraging. Rajiv Biswas of HIS Asia-Pacific told the BBC that "Net exports are providing a positive contribution to Chinese [economic] growth at a time when domestic demand has been moderating, particularly due to the slowdown in the residential construction sector". Indeed exports increased by 4.9% last year - a passable figure given the sluggishness in external demand from Europe and elsewhere. According to statistics from the Administration of Customs, the country's trade surplus surged a whopping 45.9% in 2014. This translates into a current account balance of around 2.35 trillion CNY.

This entire means that the central bank has plenty of ammunition if they were to opt for stimulus measures in 2015. Bloomberg's Tom Orlik argues that because "monetary conditions in China are still tight and growth is still disappointing, so it all seems to point to further rate cuts coming into 2015". He went on to say that "our expectation is that the central bank is going to move again in the first quarter". The authorities' decision on whether or not to engage in a lending spree over the next few months will speak volumes. It will tell us if they are more concerned with meeting growth targets or ensuring stability in potentially de-stabilising asset classes.


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