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ECONOMY: China Economy Report November
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As the Chinese economy moves into the fourth quarter, the top leadership maintains its position that the Chinese economy remains on track, despite concerns of an economic slowdown and a hard landing. President Xi Jingping, speaking at the Asia-Pacific Economic Cooperation (APEC) in Indonesia on 7 October, stated "I'm fully confident in the future of China's economy. The slowdown is an intended result of our own regulatory initiatives." His statement reinforces the stance that new leadership of China is much more concerned about reforming the economy than stimulating it, guiding the nation away from debt-driven investments in infrastructure and property towards a more sustainable consumer driven path. Mr. Xi also stated that he believes a "7% annual growth rate [would] suffice" to meet China's medium-term goal of doubling per capita income by 2020.

Later this month, the top government officials will meet behind closed doors for the Third Plenum of the 18th Chinese Communist Party Central Committee, a session held once every five years. The meeting will unveil President Xi Jingping and Premier Li Keqiang's priorities for reforming economic policy for the next decade. Many analysts are hopeful that the new leadership will stick to their guns and deliver some sweeping economic reforms including bolstering the role of the market, expanding opportunities for small and medium sized firms, allocating capital more efficiently, and improving the balance between consumption and investment. “We expect the meeting to approve a document laying out the broad principles of China’s next stage of economic reform. Hopes are high that the document will mark a significant breakthrough in policy across a range of economic issues,” Standard Chartered’s David Mann said in a note.

Yet, there are a number of skeptics out there who believe that the policies set forth later this month will be too general, dismissing the reforms as “too little too late.” China's government has been too careful in the past when it has come to radical reform. Analysts from China's top government think-tanks say that reform measures are limited as a drastic shift in policy would intensify the current economic slowdown and push the government towards reverting to more tightly controlled market conditions. However, without substantial reforms in the next five years, the International Monetary Fund economists forecast that China's growth could fall to an average of 4% annually through 2030.

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APEC and Indonesia

Mr. Xi was the keynote speaker in early October at the 2013 Asia-Pacific Economic Cooperation (APEC) held on the Indonesian resort island of Bali. During his keynote speech Mr. Xi addressed the slowdown in the global economy by saying that “achieving a full recovery and the healthy growth of the world economy will be a long and tortuous process", and that the major global economies need to strengthen their macroeconomic cooperation as they try to resolve their structural problems. 

With president Obama not in attendance due to the US government shutdown, Mr. Xi was the dominant leader at the economic integration forum. APEC, with its 21 members including the US, Russia, China, Mexico, and Canada, accounts for 40% of the world's population, 55% of global GDP and 44% of world trade. The absence of Mr. Obama could prove costly for US foreign policy as he planned to use his powers of persuasion to push forward negotiations for the Trans-Pacific Partnership (TPP), a trade bloc that is led by the US and that currently excludes China. The goal to finish the complex negotiations for the TPP, which aims to bring regional economical integration through trade and investment liberalisation, was set for the end of the year.

As we turn the page into November, this ambitious goal is starting to look unobtainable. Obama's absence was also detrimental to American interests in Indonesia. China has continued to effectively increase its economic presence in the booming island nation, which up until a few years ago was met with resistance. In September, China announced plans for a 50 billion USD infrastructure bank to service the region. Mr. Kurtz, an American living in Jakarta, commented that “China’s effective economic support was unmatched by the United States... soft power loses to hard currency most of the time.”

 

September and Third Quarter Data

China's annual growth in Q3 has picked up to 7.8% year on year, up from 7.5% year on year in Q2. After the economy slowed down in 9 out of 10 of the last quarters, China's economy looks to have stabilised since mid-year after Beijing implemented measures to stem off a sharper downturn amid reform efforts. However, recent economic policy and data from September indicates that month-on-month growth is flattening and will continue to do so under tighter credit and fiscal restraints. This in turn will most likely result in a downturn in growth during Q4. "Looking forward, we expect Q4 growth momentum to be somewhat weaker than in Q3 due to tapering restocking demand and weaker credit growth," Tao Wang, an economist at UBS in Hong Kong, stated in his research notes.

The official purchasing managers' index (PMI) for the non-manufacturing sector rose to 55.4, the highest it has reached since March. The service industry has increasingly become a strong mainstay of the Chinese economy while the manufacturing industry's growth has been sluggish. The HSBC China manufacturing PMI showed a slight gain in September up to 50.2 from 50.1 in August, which was below analysts' expectations.

Analysts are expecting CPI to edge up from 2.6% in August to 2.7% in September, well below the government's threshold of 3.5%. Meanwhile, PPI is expected to fall 1.5% from a year earlier, compared to a 1.6% drop a month earlier. This decline in PPI can be attributed to recovering production and demand.

Industrial production in September is expected to continue its strong growth. A Reuter's poll showed that industrial production growth is expected to have grown by 10.2%, though lower than August's 10.4%. The turnaround looks to have been led by infrastructure spending of the state sector, which has benefited heavy industry the most, mirrored by the recent acceleration in electricity output, Capital Economics Williams and Wang said. Septembers investment figures should give further details on whether this imbalance has continued. 
 
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By Justin Toy
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