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ECONOMY: July China Economy Report
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altChina’s second-quarter economic growth could fall below 7 percent 

China’s economy is slowing down at an alarming pace. China’s industrial output growth, which usually outpaces GDP growth by 3-5 percent, rose 9.6 percent in May from a year earlier, slightly increasing from a three-year low of 9.3 percent in April. 
 
Zheng Xinli, a former Deputy Director of the Chinese communist party's policy research office, is one of the most bearish economists on China’s economic outlook.  “GDP growth in the second quarter could fall below 7 percent if there is no significant improvements in economic data for June," the overseas edition of the People's Daily quoted Mr. Zheng, now Deputy Head of the China Center for International Economic Exchanges (CCIEE), a top government think-tank, as saying.
 
While the market anxiously waits for Beijing to publish second-half economic indicators in mid-July, analysts forecast in a Reuters benchmark poll in May that China would deliver its weakest quarter of growth, in three years, in the second quarter at 7.9 percent. This would also mark the sixth straight quarter of slower growth. They forecasted full year growth is 8.2 percent.
 
Beijing has been stepping up policy steps to combat the slowdown, cutting interest rates by 25 basis points in early June for the first time since the depths of the 2008-2009 global crisis and fast tracking infrastructure and industrial investment projects, according to Reuters. China has also cut bank reserve requirements three times since December as policymakers hope to boost lending to help growth according to AFP. 
 
Cutting interest rates and bank reserve requirements are seen as a policy signal by Beijing of easing monetary policy to stimulate the economy. As mentioned in the June China Economy Report, this is not an effective tool to boost the economy and may undesirably boost inflation.  
 
Inflation, industrial output, and retail sales all showed slowed economic growth in May, but exports and imports were much better than forecasted as stronger U.S. demand helped offset weakness in Europe stemming from the region's debt crisis, according to Reuters. 
 

Chinese inflation also slows, stimulus “very likely”

 
China's inflation eased to 3.0 percent in May as other data released on 9 June indicated a slowdown in the world's second largest economy, giving Beijing more room to ease monetary policy to stimulate growth according to AFP.
 
 alt
 
It’s good news that inflation is below the four percent target set for this year and should provide more breathing room for Beijing to stimulate the economy. "Inflation is easing as expected, or easing even faster than expected, which is mainly due to economic weakening not only in China, but also around the world," said UBS economist Wang Tao.
 

China’s labour shortage problem is getting worse

 
Despite that global demand for Chinese manufactured goods is falling, finding workers in southern China is harder than last year, according to an annual survey conducted by the Chinese Manufacturers’ Association of Hong Kong.
 
This is surprising, given there are fewer orders to be filled. In the first three months of the year, 86 percent of respondents saw orders fall or stay flat, compared with 72 percent last year. After all, the struggling economies of the US and Western Europe are the biggest importers of Chinese products. 
 
At the same time, over 90 percent are struggling to hire enough workers. On average, they are 14 percent short of the number of staff they need, compared with 11 percent last year.
 
One reason is the Guangdong government’s December decision to suspend a planned increase in the minimum wage. At the time, that decision was cheered by factory owners who were already struggling to cope with a 21.2 percent rise in minimum wage imposed in 2010. The flip side is that even fewer migrant workers now feel it’s worth their while to work in the province, where the cost of living is among the highest in the country.
 
“My friends have built cinemas and bowling alleys in their factories to try and retain staff. They have raffles to lure back workers after the Chinese New Year holiday. But it’s been useless. The migrant workers still don’t want to stay,” Irons Sze, President of the CMA,  and whose family owns a fibre manufacturing business told Financial Times.alt
 
The only way out seems to be a move up the value chain. Having your own brands would bring better profit margins and better growth prospects, especially if they appeal to mainland Chinese consumers. More than half of the survey’s respondents are moving in that direction. 
 
Sze warns that the bureaucracy and taxes involved are together more complicated than a traditional contract manufacturer is used to. “That is why original equipment manufacturers have started switching to [manufacturing for other brands] in recent years. It’s not because they particularly want their own brands. It’s just that they don’t have a choice,” he said.
 

Chinese real estate market in chaos

 
The below story, by Financial Times, captures Chinese home-buyer sentiment these days. 
 
Feng Mingshun emerges from the condo showroom, blinking in the midday sunshine. He’s just signed over a 50% down payment on his first home, a $250,000 apartment in a half-finished tower in a distant Beijing suburb. To do so, he had to pool savings of his parents and his in-laws, who plan to live with Feng and his wife. Still, the 31-year-old is playing it cool. “I feel some relief. We’ve been looking for a long time,” he says. “For us, this is a good time (to buy).”
 
Chinese property developers have been gripped by government policies aimed at slowing down widespread real-estate speculation. After peaking in early 2011, prices of residential property in cities across China have dropped, leaving developers troubled by unsold inventory and piles of debt. Shares in overextended builders listed in Hong Kong slumped last year on fears of a cash crunch.
 
Now, some developers see green shoots. Alarmed by slowing economic growth, Beijing has begun to ease up on credit restrictions and fast track public spending. “Market sentiment is very positive,” says Simon Fung, Chief Financial Officer of Greentown China Holdings, a luxury developer. He says sales data showed an uptick in May as buyers sensed that prices have bottomed out.
 
Greentown isn’t alone. Moody’s said in May that 11 of the 29 Chinese developers that it rates face liquidity pressures. In total, the 29 rated developers owe USD 25 billion in debt that matures in 2012, of which USD 5 billion is held offshore. Credit costs have risen sharply. Developers rated below investment grade are paying yields of over 12% on offshore bonds, according to Moody’s.
 
altWhile developers argue that they’re building to meet real demand, property remains a favoured depository of wealth in China, as in much of Asia. Poorly performing stock markets, limits on overseas investments, and bank deposit rates that lag inflation, have all reinforced this bias towards speculation in real estate. This in turn drives up prices to levels that squeeze out would-be owner-occupiers. 
 
China’s wealthy upper class, flush with cash, isn’t happy with sitting on money in the meantime. Its hunger for property is now sending buyers overseas. Wealthy Chinese home buyers are now regularly shopping for properties in places like New York City, Los Angeles, and San Francisco in the U.S., and in Vancouver and Toronto in Canada.
 
Amela Liebman, Chief Executive of The Corcoran Group, a residential real estate brokerage company, told Financial Times, there has been a “huge” influx of wealthy mainland Chinese shopping for high-end properties in New York since the start of the year.
 
“It’s extraordinary,” she says. “Five years ago, we never talked about Chinese buyers. We started noticing them 18 months ago, but they have only become much more prevalent in the past year.”
 
The National Association of Realtors says that from March 2010 to March 2011, the Chinese became the second largest foreign source of home buyers in the U.S. after Canadians, making some $7.4 billion worth of private home purchases, or 25 percent more than the previous year.
 
Reasons for purchases, explained by Financial Times, vary say those who have dealt with overseas Chinese buyers. Some are buying because they want to emigrate or they have children who will go to school in the US. Others buy because the numbers add up; despite its recent dip, the CNY is still up more than 4 percent against the US dollar since the start of 2010, while US house prices are still in recovery mode and appear cheap compared with Australia or Canada.
 
“When you look at how cheap US real estate is now compared with China, it makes a lot of sense to buy there, especially since you have more rights when you own a property in America,” said a wealthy Chinese investor who has bought several properties in the US, but asked not to be named so as not to draw attention to the fact of shifting assets abroad.

By Hyuk-tae Kwon
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