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ECONOMY REPORT: Monthly Economy Report
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Monthly Economy Report

By Andrew Smith

BT 201512 030 01 Economy Report 001Although there isn't much of a macroeconomic recovery to report this month, there is at least an interesting discussion point or two to weigh in on. Most notably, the Singles' Day Shopaholics phenomenon. When November 11 finally rolled around there were plenty of retailers breathing a profound sigh of relief with the long awaited boost to their sales. In a display of just how powerful the Chinese consumer engine can be, most analysts estimate that the country's online shoppers collectively spent US$ 9 billion in just 12 hours of shopping. However, according to Ali Baba's estimates, that figure could have been as high as US$ 14.3 billion. In reaction to the spectacular display of purchasing power, the company's founder Jack Ma reminded us that China "has currently got 300 million middle-class people, and we believe in the next 15 years ... a half billion people will be middle-class, and the demand for high-quality products, high-quality services is huge".

As the figures came in, it didn't take long for the euphoria to spill over into the financial world. Within a day of the event, news providers were proclaiming that the spending of ordinary Chinese consumers could be enough to kick start the whole global economy. One report by CBS, entitled 'Can Chinese Consumers Save the World Economy?' said "Long the place that makes stuff but doesn't consume much, China is set to redress the balance. And thus, some say, rescue the troubled global economy".

While it is obviously sensationalist to even hint that one single shopping spree could correct the global economic problems of the moment, it does provide some food for thought with regards to the broader context of China's economic transition. Namely, this is a work-in-progress by the central authority to steer the nation away from a reliance on export-led growth towards a more sustainable, domestic, consumption-based model.

As Larry Light of Moneyweek says: "The idea is that an economy more reliant on consumers is more stable than one that churns out goods for sale to foreign buyers whose fortunes fluctuate. Plus, the thinking goes: a consumer-centric economy may be less prone to constructing enormous boondoggles, like China's high-speed rail project and its millions of vacant apartments".

So far the government's plan to help this process along has included: debuting a nationwide pension system; and offering universal medical insurance and alleviating some taxes for businesses. They have also been encouraging banks to reward depositors more on their savings, and to help smaller companies, letting non-bank lenders offer financing. Moreover, in a further effort to boost consumption, the government cut taxation on purchases last month. From a retail perspective the plan seems to be going pretty well. As Chinese Premier Li Keqiang told a global economic forum last year: "We will continue to increase household consumption and make sure that greater internal demand could serve as a new power to drive economic growth."

BT 201512 030 04 Economy Report 001In other, non-consumer related news, the manufacturing sector seems to have continued its long-running slide. In October, PMI figures showed an unexpected third-month-in-a-row contraction, with a reading of 49.8. This came in below the majority of analysts' expectations of a very moderate rebound. Not surprisingly, this data -- coupled with official estimates of a 6.9 percent GDP growth rate in the third quarter -- have fuelled further speculation that the economy will struggle to achieve the government's growth target of seven percent for the year.

This increasing gap between the booming retail sector and sluggish manufacturing activity has inspired some economists to characterise China as a 'two track' economy. If it was a simple case of one weak sector being offset by a strong one, or vice versa, then it wouldn't be so alarming. However, it is worth noting that the other big factor behind China's boom -investment -€“ may also be slowing down. The nation's statistics agency has said that fixed-asset investment grew 10.2 percent year-on-year in the first 10 months, compared with a 10.3 percent increase in the first nine months, while property investment grew two percent from January to October year-on-year -- its slowest pace since the financial crisis.

On the upside though, at least capital inflows turned back to positive in October. Since the central bank stepped in to perform a strategic, one-off devaluation of the Renminbi earlier this year, there has been a predictable, but nonetheless damaging net capital outflow. For the time being at least, there does seem to be some encouraging signs as money is once again starting to move back in the opposite direction. October indicates that the central bank and other Chinese financial institutions bought a net CNY 12.9bn (US$ 2 billion) in foreign exchange, breaking a four-month streak of net sales. Net forex purchases are considered a sign of capital inflow, while sales indicate outflows. October's purchases followed record-high net sales of CNY 761 billion in September.

Larry Hu, China economist at Macquarie Securities, said: "The fear of devaluation has been alleviated a lot recently. When the Renminbi surprisingly depreciated on August 11, we predicted that it would depreciate less than five percent by year-end. That call has become much less controversial recently compared with three months ago".

BT 201512 030 04 Economy Report 004
Given these recent market conditions, it won't surprise many people that deflation is back on the analytical forefront. The threat of a price plunge remains a very real one, despite persistent efforts by the People's Bank of China (PBoC) to support the economy by slashing interest rates so far this year. According to the latest reports, consumer prices increase by 1.3% year-on-year in October which, although still above deflationary territory, does fall well short of the government's 3% annual target.

A number of leading economists are saying they expect the Chinese central bank to cut required bank reserves at least one more time this year, in addition to pushing through more infrastructure project approvals and urging local officials to spend faster in a bid to stimulate growth. The National Audit Office recently identified CNY 14.2 billion (USD 2.23 billion) worth of water, agriculture and social-housing projects that remain unspent.


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