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China Economy - January 2012

Source: OPEC 1/16/2012, Location: Asia

China’s economy will grow by around 8.5% this year. GDP growth is expected to drop in the first quarter of the year, only to accelerate in the second quarter and beat last year’s growth rate in the third quarter. First-quarter growth would be dragged down by falling property investment and lower exports to Europe and to the US. The rebound in the second and third quarters will be brought about mainly by Euro-zone improvements, loosening domestic monetary policies and fiscal measures that encourage consumption and investment in the public sector. Consumer prices are predicted to grow at a much slower year-on-year rate of 2.8% this year. The country’s Consumer Price Index (CPI) dipped to 4% in December, easing from a three-year high of 6.5% in July.

However, it still gained 5.4% year-onyear in the first 11 months of 2011, well above the government’s full-year target of 4%. The CPI eased to a 15-month low in December. But high food prices remained a reminder of the risks the government is weighing up, as it tilts policy towards boosting growth as internal and external demand for Chinese goods falters. An uptick in the annual rate of food inflation to 9.1% from November's 8.8% — the lowest since September 2010 — would be troubling for China’s government if it signalled a rebounding trend in the cost of basic foodstuffs. The Chinese PMI readings in December showed an improvement — albeit remaining well below trend levels. This comes after weak PMI records in November which reduced sentiment and negatively affected property markets. Decline in house prices in Q411 highlighted the difficulties for the Chinese economy, which is currently going through one of its weakest patches of the last decade.

However, resilient domestic demand, reflected by robust imports and retail sales in November’s figures, should limit the downside risks to growth. And, with inflation pressure declining noticeably in recent months, particularly in manufactured goods, monetary policy is likely to be eased further in the next few months. Statistics released by the General Administration of Customs show that the trade surplus for 2011 decreased by 14.5% from a year earlier to $155.14 bn. Exports grew by 20.3% and imports by 24.9% year-on-year during the same period. The previous year saw exports rise by 31.3% and imports by 38.7%. Since November, the reserve required ratio by banks was 50 bp lower when the People's Bank of China cut the rate to 21%, the first such cut in three years. This was intended to boost corporate credit lines and help firms cushion falling demand at home and abroad.

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