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China Economy – March 2012

Source: OPEC 3/21/2012, Location: Asia

Chinese premier Wen Jiabao, in his statement to the country’s National People’s Congress (Chinese Parliament), indicated that China’s target for GDP growth in 2012 was 7.5%. He has been quoted as saying that the government prefers balanced economic growth over higher growth rates that might cause imbalances, social unrest and environmental concerns. However, many observers believe that this statement should not be taken as a strict target but rather as a general guideline and perhaps even a minimum acceptable growth rate. Our forecast is that China’s economy will grow around 8.2% in 2012. This is in line with most forecasts of Chinese economic growth. This is, of course, less than last year’s 9.2% growth but there are signs that fixed asset investments and manufacturing activities are moderating.

According to “China Confidential” (Financial Times, March 2012), fixed asset investments recorded a significant decline in February. There are also reports of a decline in China’s daily iron and steel output of as much as 5.5% in the first ten days of February compared to the first ten days of January. Imports of rolled steel, generally seen as an indicator of market demand, fell 44.1% y-o-y in January. The annual growth of fixed asset investments may be less than 20% in February, compared to an average growth rate of 23.8% in 2011. It is worth noting that fixed asset investments accounted for 46% of GDP last year. Inflation is also moderating, reflecting a muted economic reality. The cost of living index has now dropped to below 4% on a y-o-y basis for the first time since September 2010.

Consumer spending has been resilient in February and, according to the same Financial Times report, has increased by 0.6% compared to January. Car sales in February rebounded from January’s sharp decline. Car sales grew by 25% in February compared to February 2011. According to the China Passenger Car Association, around 2.5 million cars were delivered in the two first months of 2011. It is expected that retail car sales will increase in March as there are signs of a rebound in sales after the Chinese New Year. Following the Chinese Premier’s report to the National People Congress this week, in which he advocated a more “pro-active fiscal policy”, some tax cuts are expected to be initiated to boost consumer spending. It is believed that tax cuts rather than expenditure increases are favored by the government in the current circumstances.

Also, high-yielding bonds are to be launched by banks to finance lending to small and medium enterprises. Another important point in China’s economic policy is its determination to reform its financial system and to make the renminbi an internationally convertible currency under capital accounts and expand its use in cross-border trade and investment. Data from the State Administration of Foreign Exchange shows that the country’s current account surplus plunged in 2011 to $201.1 bn from $303 bn in 2010. The fall in the current account surplus from the equivalent of 5.2% of GDP in 2010 to 2.9% (EIU, March 2012) implies faster growth of domestic demand compared to external demand for Chinese goods and services. It also implies that the renminbi is not as undervalued as it once was.

In parallel with foreign trade, foreign direct investment (FDI) in China fell in y-o-y terms in three successive months from November 2011 to January 2012, although FDI in 2011 was $116 bn slightly more than $105.7 bn in 2010. As China has begun to diversify its outbound investments, its sovereign wealth funds have begun to include more investments in infrastructure abroad. China’s longrunning outbound expansion in the energy sector has also continued. Chinese companies in the energy sector have been involved in investments in many countries and regions including Canada, East and West Africa and the Middle East.

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