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China Economy – April 2012

Source: OPEC 5/8/2012, Location: Asia

In February the government published a circular on reform of the household registration (hukou) system. The document suggested that population movement to large cities will still be controlled but that migrants will now find it easier to register in smaller cities. In medium-sized cities, they will be able to register for a residence permit after working for three years and paying social security insurance for one year (EIU Country Report, April 2012).

China’s premier, Wen Jiabao, outlined the government’s principal economic goals in 2012 at the National Party Congress (NPC) in March. These include real GDP growth of 7.5%, eventually moving closer to 7% annual GDP growth in accordance with the 12th five-year plan. Also, the official inflation target would average around 4% this year.

The CPI in February was 3.2% on annual basis, down from 4.5% in January. The total volume of imports and exports is projected to rise by around 10%, while the broad money supply (M2) will increase by 14%. This is lower than 2011 money supply projections of 16%, suggesting a continuation of the government’s tight monetary policy. Government expenditures on education, social security and health increased in 2011 by 27.8%, 22.6% and 33.1%, respectively. Defence spending was up by 11.4% although it is believed that this substantially underestimates expenditures in areas such as arms procurement.

Following subsiding inflationary pressures, which are believed to have peaked late last summer, the government has been easing its monetary policy mainly by reducing its bank reserve requirement ratio and leaving the policy interest rate unchanged.

The ratio was lowered to 20.5% for large banks in November 2011. The Central Bank also set the loan-to-deposit ratios for two of China’s largest banks — the Industrial and Commercial Bank of China and the China Construction Bank — at 63% and 70%, respectively, a slight increase compared to 2011 ratios.

Two important reports submitted to the NPC in March called for additional economic reforms. The first report, jointly prepared by the People’s Bank of China (PBC) and the World Bank, called for reforms in farmers’ land rights and labour mobility, as well as the privatization of state- owned enterprises. The second report, prepared by the head of PBC’s Survey and Statistics Department, called for a gradual opening up of China’s capital market over the next 10 years.

Recent data continue to suggest that the Chinese economy is slowing. Industrial value-added output was up by 11.4% on an annual basis in February, the lowest rate in two years. Electricity generation also increased by a modest y-o-y growth of 7.1% in the first two months of 2012. Cement production and car retailing have both performed poorly, and rising inventories of copper and air-conditioners, together with a trade deficit in February, all paint a gloomy picture of the Chinese economy in 2012.

However, the government’s stance at the NPC did not imply particular concern over the recent downturn, suggesting that it remained under control. In addition, surveys of business confidence suggest a brighter picture. The official PMI stood at 51 in February. For March, according to China’s National Bureau of Statistics, this index improved significantly to 53.1 as shown in Table 3.3 and Graph 3.3 below.

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