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ECONOMY: China Economy Report July
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altAs we head into the second half of 2013, more and more commentators are worried about the Chinese economy slowing down . The first 6 months of the year have been testing for policymakers, business leaders, investors and consumers alike. Questions about whether or not China can recover from the ongoing slowdown, largely brought on by weak global demand for the country’s exports, are still raging on. Only time will tell whether or not the recovery gathers momentum, and moreover, if the government’s GDP growth target of 7.5% for 2013 will come to fruition.

Growth uncertainty

Depending on whose estimates are to be believed, China’s economic growth for 2013 may end up being anywhere in the region of 7- 8.5%. It also remains unclear whether or not the pace of economic growth will slow from 7.8% in 2012. On the optimistic side, economists at Morgan Stanley have predicted that the economy will grow by 8.2% over the course of this year. Helen Qiao, a chief economist of Greater China at Morgan Stanley, has gone on record as saying that "for the first half of the year we are expecting twilight... but going through the second half, we are expecting better growth under very supportive monetary policy easing”.

This rather positive outlook is quite a far cry from Beijing’s own official estimates, which at the start of the year settled at around 7.5%. Given the less than encouraging data that has come out of China in recent months, the governments’ conservative predictions are looking more in-line with the economic reality.

On the other side of the coin though, China’s gradual economic slowdown over the last few years may in fact be a good thing for the country’s future.  From an initial glance it would certainly seem that things are becoming increasingly bleak. However, if one factors in the government’s plans to cool the economy down, particularly in terms of the real estate sector, it may well be the case that China’s economic growth over the next decade will be slower but at the same time more sustainable.

During a recent speech in Germany , new premier, Li Keqiang said that his party are actively seeking to achieve “7% average GDP growth over the next decade”. It is a figure which is still high but makes the nation’s economic aspirations more achievable and allows for some intentional corrections and transformations to take place within certain sections of the economy.


Manufacturing and services woes continue

Judging by figures released in May, growth in China’s service sector had changed very little from the previous month. According to the HSBC Market Purchasing Managers' Index (PMI) for the services industry, the figures moved up very slightly to an overall reading of 51.2, following a 51.1 measurement in April.

Analysts would have hoped for faster growth, which in turn would have indicated that the broader economy was gaining some momentum. HSBC’s chief economist for China, Qu Hongbin, told Reuters that "A soft patch in manufacturing growth continues to weigh on this industry and adds more downside risks to China's growth rate”. In the same report, the news agency also quoted Standard Chartered leading economist Shen Lan, who said that "We are not so optimistic on economic growth in the second quarter. We expect that GDP growth will probably slow to 7.6% in Q2. China's economy is facing pressures of destocking while it still takes time for the credit growth to feed into firms' investments”. On a brighter note though, he did explain that his firm “thinks the recovery will be more obvious in the second half of the year”.

With nothing much changing in the global economy from last month, weak external demand for Chinese goods is likely to keep growth in the manufacturing sector slow for some time.

Inflation and lending rates adds to stimulus expectations

Last month’s report explained the difficult situation facing the Chinese government and central bank with regards to stimulating the economy. Inflation, which is seen by many as the most telling indicator of whether monetary measures are a ‘relatively safe option’, continues to stabilise.

altChina’s National Bureau of Statistics released its figures for May in early June, showing that the official rates of inflation were 2.1% year on year; down from 2.4% a month earlier.

Ting Lu, economic analyst at Bank of America Merrill Lynch, told Business Insider that “the lower than expected CPI in May was mainly driven by an unusually large sequential decline in vegetable prices.” With regards to policy measures, he added that "though falling inflation might trigger concerns about weaker-than-expected growth and a deflationary risk, the low inflation will give policymakers more room to maintain accommodative monetary and fiscal policies.”

Bank lending rates are also adding to speculation of an interest rate cut later in the year. Data from China’s central bank showed that in May banks lent CNY 667.4 billion in new local currency loans, which missed market expectations of CNY 850 billion and furthermore, came in much lower than April's CNY 792.9 billion.

One such advocate of policy easing is Jianguang Shen, chief economist at Mizuho Securities Asia, who argues that "the financing cost for companies is very high right now and the central bank should further pursue interest rate liberalisation. China's fiscal policy in the second half of 2013 needs to protect consumption growth and support investment." However, whilst it is true that an interest rate cut would most likely encourage more lending, it would be a risky move in terms of the knock effects it may have towards the overheating real estate sector.

Debt worries increase going into July

The International Monetary Fund (commonly referred to as the IMF) recently caused a stir amongst Chinese policymakers and economists after the organisation estimated that public debt levels have now reached 50% of China’s GDP. Speaking at a press conference after the IMF’s completion of their annual China economy review, David Lipton, the organisation’s first deputy managing director, said that "reining in total social financing growth is a priority and will require further tightening of prudential oversight as well as, critically, improved investor accountability for their investment decisions."

Debt worries in the world’s second largest economy have been mounting for some time and will undoubtedly continue to grow as the economy looks increasingly to be running out of steam. Earlier in the year China’s former commerce minister, Xiang Huaicheng, stated that overall public debt had surpassed CNY 30 trillion, 37.8% of the country’s GDP, by the end of 2011, and then reached 40% of GDP in 2012. The trend, therefore, is clearly moving upwards; regardless of how accurate the IMF’s predictions are.

If China’s government debt levels continue to generate concern amongst financial commentators then it will almost certainly have a negative effect on the broader economy. Not only will it make the country less attractive to investors, it will inevitably lower China’s economic outlook for growth and give policymakers less room to move in terms of stimulus measures.

By Tracy Hall
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