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ECONOMY: Monthly Economy Report
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Monthly Economy Report

By Andrew Smith

BT 201606 010 04 EconomyAfter what seemed like a more stable couple of months than the turbulent period that preceded it, the Chinese economy is once again showing signs that economic activity is, on the whole, still slowing down. According to data by the National Bureau of Statistics, growth in factory output was down to just 6% in April this year, compared with 6.8% in the previous month. The figures came in lower than analysts' mean expectation of 6.5% growth annually. As has been the case for some time now, this weaker production growth is largely due to a combination of persistently weak demand from key export markets in Europe and North America, as well as being somewhat symptomatic of the Chinese government's ambition to steer the economy towards services.

Overproduction and debt levels are also important factors. Excess capacity has been a problem for some time now but recently it has become one of the major talking points, as more and more commentators realise the profound effect it has been having on the Chinese economy. This is particularly true of things like steel, aluminium, diesel and a range of other key industrial goods. The result has been price gluts and an increase in layoffs within the manufacturing sector. Meanwhile, although it is difficult to acquire precise data, the debt situation still remains tense and it is also having an impact on businesses whose leaders are feeling the pressure from creditors.

Data for the Chinese retail sector told a similar story, with growth in April slowing to 10.1%, 0.4% lower than figures from March and analysts' forecasts that it would grow at 10.5% during the year as a whole. Most notably car sales dropped significantly, with only a 5.1% like-for-like increase on figures from April last year. Of course 10.1% doesn't sound like all that catastrophic when compared to the kind of like for like figures we see coming out of Western economies. However, for the Chinese retail sector, which has been the most encouraging growth area in the economy as a whole over the last year or so, the most recent data isn't all that encouraging.

The country's fixed-asset investment growth eased to 10.5% year on year, between January and April 2016, falling short of most analysts' expectations of about 10.9% growth and it is down from the first quarter (Q1) figure of 10.7%. The key point here is that the growth rate of private investment dropped half a percentage point, from 5.7% in first quarter to 5.2% in the January-April period, implying that private businesses are worried about China's economic prospects; or rather, they are worried that the breakneck speed of growth has now come to an end.

BT 201606 010 01 EconomyThe only major bright spot to report is the property market. According to the most recent data form the National Bureau of Statistics, housing sales between January and April rose 61.4% to 2.41 trillion yuan (USD 369 billion) from a year ago. Property investment in the first four months of this year rose 7.2% to 2.54 trillion yuan. Construction starts gained 21.4% to 434.3 million square metres. "Property developers' appetite has returned," said Xia Qiang, a senior partner at Yi He Capital, which provides loans to property firms. "Just two weeks ago four developers from Fujian and Zhejiang asked if there were any projects they could invest in in Shanghai".

The Wall Street Journal's Esther Fung points out though that "the rosy statistics present a quandary for Chinese officials". After engineering a credit-fuelled property upturn, Beijing has started tapping the brakes amid concern that it has overshot, economists say. Among the fixes Beijing has imposed are a decrease in bank lending and more purchase restrictions on some of the hottest property markets, including Shanghai and Shenzhen. A column in the official People's Daily recently criticised debt-fuelled growth policies, warning that China faces a "property bubble". That being said, the recent upturn in property prices will certainly provide some comfort to investors and other financial players who have been drowning in bad news for quite some time now.

Going forward, while most analysts predict that the slowdown will persist and many of the structural problems will still be there a few years down the line, not everyone is pessimistic about China's future prospects. Dr Michael Ivanovich told CNBC that, "I believe that Beijing is fully aware of what they are up against. All of China's current structural changes (reforms) are aimed at enhancing the efficiency of its human capital (through education and vocational training), dealing with excesses and inefficiency in the state sector and at fostering technological innovation to raise the quality of its (physical) capital stock". He went on to say that "The test of these policies will be (a) the pace of future economic growth, (b) price stability and (3) (yes) the profitability of the corporate sector. All that will tell us how successful China's allegedly wholesale and wholehearted embrace of a genuine market economy will be". These key indicators are certainly going to be the main things to look out in the future but let's hope that Ivanovich is right about the long term future as well.

BT 201606 010 02 EconomyLast month, a high ranking Chinese official, believed by some to be President Xi Jinping, also weighed in on the current economic situation. On Monday 16 May, People's Daily published an 11,000-word article revealing statements on China's economy from a mysterious "authoritative source" in a question-and-answer format. This included a clarification on the policy shift in China that many investors have grossly misunderstood. The source explained that, "A tree that cannot grow up to the sky--high leverage will definitely lead to high risks," Bloomberg quoted the interviewee as saying. "Any mishandling will lead to systemic financial risks, negative economic growth, or even have households' savings evaporate. That is deadly".

Meanwhile, the 20,000 word speech transcript published on 17 May clarified some points, particularly one about his supply-side economics that he thoroughly differentiated from the Western-style reform similar to that of former United States President Ronald Reagan. "I need to be clear, the supply-side structural reform we are talking about is not the same as the supply-side economics school in the West," the source stated, explaining that the interpretation can be very different. The reform agenda they laid out entails, "cutting capacity, reducing inventory, cutting leverage, lowering costs, and strengthening the weak links".


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