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China Economy – December 2012

Source: OPEC 12/27/2012, Location: Asia

The strong call for reform issued last week by premier-designate Li Keqiang, who acceded to number two in the Communist Party’s new Politburo Standing Committee in mid-November, was the first clear affirmation that the administration of Xi Jiping, appointed as the Party’s General Secretary, intended to push through significant changes over the next decade. Mr. Li is quoted as saying “reform is still the biggest bonus for China. We have benefited from reform in the past 30 years.

We have to march on as there is no way back…we have to face challenges and break all the systematic obstacles that block scientific development.” Such words are clearly a sign of new leadership and have a clear message to push for ground-breaking reform aimed at creating a mature, market-oriented economy (FT, China Confidential, 29 November 2012). Continuing in this reformist vein, Mr. Li has said recently that the Chinese economy would be further opened to foreign companies, thus bringing more opportunities for cooperation between China and other countries.

Aside from policy signals, the real economy appears to have performed strongly in November, with manufacturing activities rising significantly. Several other readings reinforced a sense of robust activity in real estate. Home transitions in 54 major cities reached 236 units in November, posting month-on-month growth of 30.6%. According to the China Index Academy, in the week to 18 November, 36 of 40 monitored cities saw home transitions go up y-o-y with the northeastern city of Harbin posting the biggest rise of 971.7%. Meanwhile, in spite of the obvious rebound in the economy in October and November and given the expectation that this robust phase will carry through to December and the start of 2013, inflationary pressures remain fairly subdued.

China's macroeconomic indicators have improved in recent months, helping industrial profit to turn around. Not only did total industrial sales revenue grow to 10.3% compared to one year ago but total industrial profits rose 0.5% over the first 10 months of the year (JP Morgan, November 2012). Among the major industrial enterprises, industrial profits in the state-owned sector fell 9.2% during January- October, while sales revenue rose 5.3% over a year ago. On the other hand, industrial profits at domestic private enterprise continued to outperform, up 17% over a year ago in October, with sales revenue rising 16.8% y-o-y. For much of this year, the weakening in corporate earnings has been as one of the significant constraints on corporate capex and overall fixed investment growth. In addition to improving signs from the bottom up, enterprise level sales and profits data, we have observed some early signals that the corporate sector’s de-stocking process is likely near an end, as suggested by the stabilization in the manufacturing PMIs finished goods inventory component in recent months (JP Morgan, December 2012).

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