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ECONOMY: China Economy Report May
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Growth for Q1 weaker than forecast
 
To the surprise of officials and financial commentators worldwide, China reported weaker growth figures than had previously been anticipated for the first quarter of 2013. According to official figures, the annualised growth rate based on January- March of this year is 7.7%. Figures from the previous quarter comparatively indicated 7.9%, thus the country’s rate of economic growth seems to be steadily deteriorating. The reason why this has had such a negative knock on effect in terms of investor confidence is that many analysts had been predicting an annualised growth rate much closer to, or even surpassing 8%.
 
Key indicators also show that industrial output slowed significantly during this period. According to data from the National Bureau of Statistics of China, the trend for industrial added value output consistently declined throughout the first quarter- averaging 9.5% growth and down by 2.1% from the growth recorded during the first quarter of 2012. 
 
Despite the impact this data has had on global stock markets, most analysts are remaining fairly optimistic for the Chinese economy throughout 2013. Wei Yao of Société Générale told the BBC that “although these figures showed that the economy is in a weak recovery… the Chinese economy is showing soft growth momentum in the first quarter”. He also added that “given Beijing's goal of restructuring the economy, a relatively moderate economic growth is not a bad thing in the longer term”. 
 
There is certainly a case to be made for a controlled slowdown given the very real and present danger of economic overheating. It remains to be seen, however, whether or not this recent slowdown GDP growth is a symptom of sensible policy measures or indeed an indication of a prolonged slowdown in aggregate productivity over the course of the year.
 
Ratings agencies deal further blow to Chinese economic outlook
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In April, two of the world’s biggest and most respected financial rating agencies, Moody’s and Fitch, lowered their outlook on China’s credit prospects for 2013. Earlier in the month, analysts at Fitch Ratings slashed China’s credit rating from A+ to AA-. Ratings giant Moody’s followed suit a week later in downgrading their outlook for Chinese debt on the back of increased fears that over borrowing by the public sector could eventually damage the wider economy. A spokesperson for the agency told CNN that "progress has been less than anticipated in the process of both reducing latent risks by making local government contingent liabilities more transparent and in reining in rapid credit growth; therefore, some of the upward pressure on the Aa3 rating has eased". 
 
Ever since Chinese officials enacted policy measures to stave off the impact of the 2008 financial crisis the country has been awash with relatively cheap and readily available credit. Some analysts have blamed this credit situation for the run up in real estate prices of recent years. But regardless of the nation’s financial allocations, there is clearly a need to re-organise both the public and private debt situation in order to secure the sustainability of long term economic growth. China’s National Audit Office recently estimated that outstanding government debt was well in excess of 30% of the country’s GDP (somewhere between CNY 15-20 trillion). Whilst this is much lower than Japan and most western economies, it is still an unwelcomed occurrence for a country which has previously thrived off the back of its superb individual saving rates. 
 
Trade and retail data paints encouraging picture for domestic demand
 
Data suggests that China ran up a surprise trade deficit in March after imports rose by around 14% from a year earlier. Gross exports which increased by 10% from a year earlier were heavily outweighed by the surge of demand for imported commodities and consumer goods. Demand for fossil fuels and industrial metals, particularly copper, certainly played an important role in bringing about the dramatic trade deficit. But in terms of the broader context, many commentators are taking this recent trend as a strong indication that measures to divert the Chinese economy away from exports and towards domestic consumption are starting to take effect. Chief Economist at JP Morgan Chase in Hong Kong, Zhu Haibin, has argued that “this cycle is probably coming to a turning point”, and furthermore “if domestic demand turns out to be stronger than expected, it is definitely positive for the economic outlook”.
 
Sentiment towards global trading circumstances in 2013 is also quite high. The China Daily recently reported that Chen Deming, the country’s Minister of Commerce, affirmed his administration’s positive outlook by saying that "generally speaking, foreign trade this year will be slightly better than last year. I am cautiously optimistic about the whole-year prospect”. Chen’s view is in line with the many economists who are expecting the global economic situation to improve over the coming months. While the economies of Europe and North America remain fragile, the prospect of a sluggish global recovery looks increasingly likely. This will of course have a positive impact on China’s own growth prospects. 
 
In addition, although the rate of growth for retail consumption was down compared to the first quarter of 2012, year on year growth within the sector remains substantial and provides further signs that domestic consumption is robust. Figures for Q1 2013 indicate a 12.4% rise from a year earlier- taking the total sales number for the first three month period to CNY 5.54 trillion (USD 887 billion).  
 
Inflation slows down following early year concerns over prices
 
Figures released earlier in the year caused widespread fears that inflation was surging back towards the unsustainably high rates seen in recent years. The most recent indications, which posted a significant slowdown between February and March from 3.2% to 2.1%, will have come as a huge relief to policymakers and central bankers. These recent figures are around what most economists would consider to be a reasonable rate, and therefore the need to implement anti- inflationary measures, which at this stage in China’s economic recovery could be very damaging, will most likely be averted. 
 
 
According to the CPI (Consumer Price Index), the most significant factors for the slowdown in inflation are food prices and reduced demand for holiday-related products. The spike in February may well have been fuelled to a large degree by seasonal demand and price increases over the Spring Festival period. Now that the holiday season has passed and weather conditions are helping to improve agricultural output, the price growth of staple food products should remain fairly stable over the next few months. 
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By Tracy Hall
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