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ECONOMY: China October Economy Report
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Economic Reports Indicate that the Chinese Economy
is Rebounding

Economic data released at the beginning of August is indicating to many analysts that China's economic slowdown has come to an end. The July data showed the consumer price index had risen by 2.7%, lower than economists expectations of 2.8%. Producer prices fell by 2.3% year-over-year in July, compared to analyst expectations of 2.1%. Industrial production rose 9.7% compared to economists' expectations of 8.9%. Fixed asset investment was up 20.1%- while economists predicted an increase of 20%. Finally, Chinese retail sales grew 13.2% in July but fell below analysts' expectations of 13.5% growth.

"Amongst the data points, the most important upside surprise is [industrial production] growth," said Deutsche Bank economist Jun Ma. "This is also the highest [industrial production] reading since Jan-Feb. By sector, the growth of the steel sector accelerated by 1.8%,  auto sector by 2.1%, and that of power by about 3%. We believe that the demand for heavy manufacturing is beginning to recover, led partially by the stabilisation of the inventory cycle and partially by the rise in corporate confidence due to the mini stimulus measures announced at the beginning of July."


Inflation and Pork

Inflation might have come in below expectations, but Credit Suisse analysts Weishen Deng and Dong Tao believe that it will increasingly climb in the coming months. July's lower than expected CPI is being attributed to a large decline in fresh fruit prices. “However, this [speaking about fruit] is the item that usually comes with smaller dynamic weighting, and it is a more volatile component of the CPI basket. Prices for those more persistent components with higher weights were actually on the rise, such as pork prices, rental costs, and residential service costs.  These will likely bring upward pressure to CPI inflation in the coming months, in our view,” wrote the team from Credit Suisse.

Food accounts for approximately a third of the Chinese CPI- of which pork holds a considerable amount of weight; the meat accounts for three-fourths of all meat consumed in China. Last year, people in China consumed 53 million tonnes of pork, more than six times as much as in the US. Over the past decade, pork has been the biggest driver of inflation and prices are expected to continue to rise after a record breaking hot summer, during which people were said to be “frying bacon on manholes”. The extreme levels of heat have significantly affected the pace of breeding and weight gains on pig farms in China. Some analysts expect pork prices to have increase by as much as 10% in August, causing overall inflation to rise up to 3%, but still below the 3.5% threshold, where the government would start to enact anti-inflationary measures.


Industrial Production, Fixed-Asset Investments and Retail Sales

Yifan Hu of Haitong Securities believes that the fixed asset investment data indicates that investment has bottomed-out as the government continues to accelerate the implementation of 'new urbanisation' policies that focus on building infrastructure projects. Beijing has increased this year's railway investment target from CNY 650 billion to 690 billion and raised its solar energy installation target to 35 gigawatts by 2015. Furthermore, 80,000 km of urban gas pipeline and 100,000 km of heating pipeline will be renovated by 2015, further driving expansion in fixed-asset investments over the coming months.

Bank of America Merrill Lynch economist Ting Lu believes that the better than expected numbers will have a significant impact on global financial markets. "By considering the rebounding official PMI and trade data, as well as the subdued inflation readings in July, we expect that today’s data will have quite a positive impact on commodities, commodity-related currencies and some Chinese stocks" said Ting. "We believe many economists will likely revise up their 3Q GDP growth forecasts soon”.


altChina Plans to Continue Reforms and Open Up More to the World Economy

At the 10th China-ASEAN Expo hosted in Nanning, the capital of Guangxi, Premier Li Keqiang said that China is willing to coordinate with ASEAN towards advancing talks of the Regional Comprehensive Economic Partnership (RCEP), and with discussing exchanges and interaction with frameworks such as the US-led Trans-Pacific Partnership (TPP). According to the Premier, the purpose of this cooperation is “to create an open, inclusive and mutually beneficial climate to make the two wheels of regional and global trade roll together”. 

RCEP is a Free-Trade Agreement (FTA) between the ten members of ASEAN and ASEAN's FTA partners- Australia, The People's Republic of China, India, Japan, the Republic of Korea, and New Zealand. RCEP will bring mutually-beneficial economic partnership agreements that will broaden and deepen the current FTA arrangements. The negotiations are expected to conclude by the end of 2015 and will account for almost half of the world's population and about a third of global economic output. 

Lu Jianren, a research fellow with the National Institute of International Strategy under the Chinese Academy of Social Science, commented saying that “for China, a country that continues to seek opening up and cooperation, active participation in cooperative mechanisms will bring more opportunities than challenges.” He went on to say that he believes regional integration in the Asia-Pacific region will see substantial progress over the next decade. East Asia and Southeast Asia are two of the world's fastest growing regions and are ready to usher in a new age of cooperation in order to sustain a high level of economic and social growth. 

By Justin Toy
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