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ECONOMY: China Economy Report September
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According to the numbers recently released by China's official statistics agencies, GDP growth is down from 7.7% in Q1 to 7.5% in Q2 as industrial production and fixed asset investments continue to decline. While the decline in GDP is in line with most analysts' expectations, many are predicting a continuing decline in China's GDP through next year. Analysts at the Japan based Nomura Securities are forecasting an average of 7.5% GDP growth in 2013 and a drop to 6.9% in 2014. Of course, given the size of China's economy, this decline will have a significant impact on global growth going forward. A recent article in the Wall Street Journal suggested that China is now responsible for about 13% of global economic activity, compared to only 5% in 2006.

PMI data has shown an increase in August to 54.1 compared to 53.9 in July, which was the first acceleration since March. "The PMI is supposed to be a leading indicator so we are witnessing a stabilisation and a sign the economy isn’t slowing down at a faster rate," said Steve Wang, Hong Kong-based chief China economist with Reorient Financial Markets Ltd. "A lot of economy-boosting measures have been put in place since the beginning of the year and there’s a time lag for those to kick in, so we should see a bit of a rebound in the fourth quarter."
 

These reports help back up Premier Li Keqiang and indicate that his policies are in fact helping to prevent a sharp downturn in growth. This will in-turn allow the Premier to pursue reforms that will secure more sustainable long-term growth in the future.

Meanwhile, the National Development and Reform Committee, China's economic planning agency, recently stated that a number of transportation related infrastructure projects will be accelerated, increasing efforts to stimulate domestic demand. In all, the committee said that 10 transportation projects should begin in the second half of 2013. Construction of Beijing's new airport on the south side of the city was due to break ground next year but is now expected to begin later this year. Other projects that have gotten the approval of the Committee are two new rail lines in Shenyang and Wuhan.

Trade Rebound Exceeds Expectations


A positive sign that China's economy is in fact stabilising after two quarters of decline is the latest trade data from July. According to the General Administration of Customs in Beijing, shipments abroad rose by 5.1% from a year earlier, compared to analysts' predictions of 3%. Imports did even better by gaining 10.9% compared to general predictions of 2% growth. The surge in imports left a smaller than expected trade surplus of USD 17.8 billion. This growth in imported goods was led by a jump in commodities- including iron ore, which rose by 17% from June to a record high of 63.3 million tons, soy imports, which also hit a record high for the second straight month, and crude oil. The sharp increase in iron ore and crude oil is being attributed to low numbers in June as there was some "catch-up tonnage coming through" according to Graeme Train, analyst with Macquarie in Shanghai.


Exports to the US and EU, China's largest trading partners, grew for the first time since February. Exports to the US rose an annual 5.3% while exports to Europe were up 2.8%. "With the U.S. economy showing signs of a gradual recovery", Ting Lu, an economist at Bank of America-Merrill Lynch, said "Chinese exporters could benefit further in coming months."


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Liberalisation of Interest Rates


On 20 July the People's Bank of China (PBOC), China's central bank, took steps towards liberalising interest rates by ending restrictions on lending rates, where previously there was a floor of 70% of the PBOC benchmark rate. It means that banks are now free to set lending rates (except for residential mortgages) at any price level they want. However, analysts were disappointed with the news as they were hoping for a liberalisation of deposit rates. "The scrapping of a ceiling on deposit rates would be the final step in China's interest rate liberalisation," Wu Xiaoling, a former PBOC vice-governor, said at a Beijing forum. "It is unlikely to happen either this year or the next." Wu went on to state that a sudden lifting of the deposit rate ceiling would likely result in a rate war between financial institutions, threatening the existence of smaller institutions. Before the deposit rate ceiling can be lifted, a deposit insurance system must be implemented to protect depositors.  


S&P analyst Liao Qiang said the liberalisation of deposit rates must be gradual so that policymakers can strike "a delicate balance" between going ahead with the financial reform and maintaining banks' profitability that would allow them to absorb losses from bad loans. The balance is needed, because Chinese banks have accumulated relatively high credit risk in sectors including local government financing vehicles, real estate development, steel and other industries grappling with overcapacity," Liao said.


May Yan, an analyst at Barclays Capital, expects Beijing to liberalise rates for deposits of large amounts and large maturities first and then introduce new products, such as large certificates of deposit. "These measures should have a smaller impact on banks' net interest margin than a 10% parallel move.
 


Many commentators believe that the removal of the lending rate floor could lead to hard times for financial institutions. With the floor taken away, large stated owned enterprises (SOEs) will now be able to push for cheaper loans. Some suggest that non-performing loans at SOEs could be rolled over at extremely low interest rates, effectively disguising what could be considered a state bail-out. In turn, the big banks would be forced to seek out higher-margin opportunities with small and medium-sized firms. As a result, they would be competing directly with smaller private-sector joint-stock banks such as China Merchants and China Minsheng. China Scope Financial, a research firm, believes that as competition increases and net interest margins decrease, the industry will need USD 50 to 100 billion in extra capital over the next two years in order to keep capital ratios steady.

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Unemployment


Although unemployment remained unchanged during Q2 at 4.1%, one of the biggest challenges facing the Chinese leadership is lowering the unemployment rate. Wang Yujin, from the Ministry of Human Resources and Social Security estimates that the number of unemployed graduates has reached over 3 million. "The job market is unable to fulfil the demands of job hunters, with 30 per cent of new job vacancies coming from the retired" commented Professor Deng Dasong of Wuhan University. However, the government has already enacted several measures in order to combat unemployment such as cutting taxes for small businesses and promising subsidies to firms taking more workers.
 
  

By Justin Toy
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