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ECONOMY: Signs of a Healthy Economy
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Signs of a Healthy Economy

By Anthony Lawry

BT 201704 ECONOMY 01The Chinese economy is still undergoing statistical morass of the Chinese Lunar New Year as macroeconomic data from February is now pouring in. As has been expected, the figures paint a strange picture of the economy as is evident by the first trade gap in three years. In February, China actually imported more goods than it exported. Imports rose by 33% while exports dropped by 1.3% from a year earlier. But while economists note the discrepancy is largely from the slump in economic activity from the holiday, others assert that it also has to do with the fact that the number was also a result of a fall in overseas shipments after the January rush to fill orders before the holiday began. So while the slump is due to the holiday itself, it is also a result of orders that have already been filled.

Further data shows this holiday gap as well. BBVA Research economists have asserted that growth was only at 4.2% for the month which is typically normal for the season. Meanwhile, economists within China put February's gross domestic product growth at a healthy 7.8%. Meanwhile, Chinese economists also suggest that gross domestic product growth for the first quarter is estimated to be at 7% from the previous year which is up from 6.8% in the last quarter of 2017. Premier Li Keqiang said that the economic growth target would be 6.5% for 2017, a lower expectation, in order to give policymakers some room to focus on reforms and create insulation from financial risks that abound in a global economy ravaged by political risk in the US and in Europe.

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Manufacturing apparently expanded for the seventh straight month owing to rising orders. Stock markets are also a good measurement to look at in order to extrapolate data from these earlier months. The Shanghai Composite Index fell after the release of data in the first week of March from an initial shock of the news, but then recovered later in the day, thus ending the trading session flat.

BT 201704 ECONOMY 03Despite this strange data, other economic figures pointed to better signs of a healthy economy. Chinese foreign reserves once again reached above $3 trillion after having slid for more than a year. This reversal is a sign that stimulus from the government resulted in profitable investments, further growth, and healthy returns. Also, return to higher treasury reserves makes it easier for central authorities or central banks to keep interest rates low without simply printing up more cash. The exchange rate also stabilized in the last month settling at around 6.8 RMB per US dollar.

Additionally, the producer price index went into positive territory again at the end of 2016 (a quarterly statistic) which was its fastest rate since the global financial crisis hit in 2008. It is up by 7.7% from a year earlier. This signifies reliving of pressure on older industries which are in extreme debt providing lesser amount of pressure on Chinese old industry lenders. Also, now that factories are buzzing with activity again, we should look forward to positive economic figures to come out next month for March.

Iron ore and steel prices are also rallying and have been for nearly a year which is being fueled by an increase in construction building, a rally which is being characterized by Reuters as a "boom", but worries are increasing over inventories of raw materials. The huge amount of resources that have been produced over the last couple of years is still creating a high degree of excess capacity which contributed to lower prices to begin with. Regardless, these pressures are being alleviated from increased construction.

BT 201704 ECONOMY 02
Consumer inflation has recently been reported to be targeted at 3% this year which has not changed from 2016. Also, consumer prices rose by nearly 1.7% in February which was an easing from the 2.5% increase in January again as a result of the Lunar New Year celebrations. The Central Bank also increased short-term interest rates in January and February and is expected to take this action again in the upcoming months.

In spite of these positive signs, there are still causes for concern. Lending is beginning to slow down to a level of 920 billion RMB in February down from January's 2.03 trillion which was the second highest month on record. Also, growth in outstanding loans inched upwards to 12.7% year-on-year in February, but money supply rose from 11.3% in January to 11.4% in February. Overall, the economy appears to be on stable footing as can be extrapolated from a holistic look at the data, but issues still need to be addressed in the larger view of China's economic picture. Whether they will be or not is yet to be determined.

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