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ECONOMY: October China Economy Report
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Chinese economy further slows downalt
When Beijing released trade data on Monday 10 September, falling import and weak industrial production showed more signs that the world’s second largest economy is in a worrisome state. 
Growth in exports, which represent about 25 percent of the Chinese economy and provides millions of jobs, slowed sharply in recent months because of weaker economic growth and austerity measures in Europe.
Chinese imports fell 2.6% in August from a year earlier. August exports rose 2.7% from a year earlier. Although this increase was better than 1.0% increase in July, it fell short of analysts’ expectations and was well below the double-digit growth rates that the export sector has managed in the past.
"The Chinese economy is now still lingering at the bottom, as the policy support has not been as strong as people expected earlier," said UBS economist Wang Tao.
Slower industrial production growth was likely due to continued destocking of inventories in areas including the steel industry- as well as weak domestic demand, Wang suggested. She expected the destocking process to continue until the fourth quarter or perhaps even the first quarter of next year.
Inflation rose 2% from a year earlier in August, up from July’s 1.8% rise. The main driver was the price of food, which rose 3.4% from a year earlier, compared to 2.4% rise in July, according to Wall Street Journal.
China’s inflation is likely to pick up in the coming months due to the upswing in global food prices caused by drought conditions in the US. The expected rise in inflation "won't prevent policy makers from loosening further if the economy is very weak, but it makes aggressive stimulus much less likely," research firm Capital Economics said in a note.
What’s next for Beijing?
China posted a monthly capital outflow in August for the third time this year, likely prompted by investors pulling funds from the world's second-largest economy in the face of slowing growth and rapidly deteriorating corporate profits.
The key gauge of capital flows has been showing a declining trend over the past few months and the central bank may need to cut the reserve ratio requirement (RRR) further to keep money supply growth in line with its 14 percent target, analysts say.
China's central and commercial banks sold a net CNY 17.4 billion (USD 2.75 billion) in foreign exchange last month, widening from a net sale of CNY 3.8 billion in July, according to Reuters calculations based on data published by the central bank on Tuesday 18 September.
Ma Xiaoping, an economist at HSBC Holdings PLC, said that the central bank was likely to cut the amount of deposits it requires banks to hold in reserve—which it has cut three times since November—if the banking system’s liquidity is tight. Lowering the RRR frees up more money for banks to lend out to customers,but another interest-rate cut has become less likely or may be delayed due to the inflation data, she said.
The government has also increased fiscal spending and accelerated approval for new investment projects. The National Development and Reform Commission—a powerful government planning agency—approved 1,555 major investment projects in the year to August, a 13% increase over the same period in 2011.
More recently, the commission last week approved dozens of infrastructure projects such as subways and highways, which Nomura estimated would add up to CNY 1 trillion (USD157.6 billion) worth of investment over four years.
China rebalances and this will cause commodity prices to drop
As China’s economic growth is slowing down it will continue to decline a lot more in the next few years as it rebalances towards a much more sustainable form of growth argues Michael Pettis, Finance Professor at Peking University. 
altThis will automatically make Chinese growth much less commodity intensive. “It doesn't matter whether you agree or disagree with my expectations of further economic slowing. Even if China is miraculously able to regain growth rates of 10-11% annually, a rebalancing economy will demand much less in the way of hard commodities,” says Pettis. 
Furthermore, surging Chinese hard commodity purchases in the past few years supplied not just growing domestic needs but also rapidly growing inventories. The result is that inventory levels in China are much too high to support what growth in demand there will be over the next few years and Pettis expects the Chinese, in some cases, to be net sellers, not net buyers, of a number of commodities.

By Hyuk-tae Kwon
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