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China Economy – March 2013

Source: OPEC 3/24/2013, Location: Asia

On 5 February, the State Council (China's cabinet) published a list of policy guidelines aimed at reducing income inequality. Income inequality is a major concern, partly because higher levels of inequality are perceived as increasing the risk of social unrest. The government claims that China's Gini coefficient (a measure of income inequality running from 0 to 1, where a higher figure represents greater inequality) fell to 0.47 in 2012 from 0.49 in 2008.

But this relied on official income series that are thought not to capture fully the earnings of wealthy individuals (EIU, March 2013). A study last year by the Southwestern University of Finance and Economics in Sichuan province put the country's Gini coefficient at 0.61, making it one of the most unequal in the world. There has been much debate over the new guidelines, which represent ambitions not hard targets. The fact that they took so long to publish suggests that vested interests may frustrate their implementation. Some of the most controversial elements touch on state-owned enterprises (SOEs). Executive pay in SOEs is supposed to be capped and such entities will be required to hand over 5% more of their earnings to the public purse as dividends by 2015. Other businesses may be nervous about the goal of raising the minimum wage from 30% of average salaries in 2011 to 40% by 2015, with minimum pay rates also being introduced on an industryby-industry basis and collective bargaining extended to 80% of the private sector by that year.

China's exports grew by 25% y-o-y in January and 21.8% in February. Imports climbed by 28.8% in January while imports growth dropped. The two first months of the year’s average for export and imports were 23.6% and 5%, respectively. At face value, the January and February exports numbers are extraordinarily strong. Yet the data have been artificially boosted by seasonal factors. Chinese New Year festivities, which occured in mid-February this year, fell in January in 2012. Shipments will thus have been brought forward to avoid the New Year break this year, and January also had more working days than 2012.

China’s Premier Wen delivered his last annual government work report at the National People’s Congress (NPC) on 5 March. The report highlighted that the 2013 GDP growth target will stay at 7.5%. The Premier emphasized that the 7.5% GDP growth target is intended to be consistent with the economy’s growth potential as well as with the pace of growth in factors of production and sustaining the environment. In addition, the report highlighted that a priority this year continues to be economic restructuring, focusing on the support of domestic demand, including both household consumption and (high-quality) investment.

On macro policy, the Premier reiterated the combination of a “prudent” monetary policy and a “pro-active” fiscal policy stance for 2013, while emphasizing the continuity and stability of macro policy, which should be forward-looking, targeted and flexible. In particular, the 2013 CPI inflation target has been set at 3.5% on an annual basis, modestly lower than the 4% inflation target for last year. The Premier noted that the 3.5% inflation target takes into account rising costs of factors of production, import inflation pressure, especially amid further expansion of accommodative monetary policy by the major advanced economies, and the room for price reforms for energy and resources.

The government will attempt to keep the registered urban unemployment rate below 4.6% and to create 9 million urban new jobs. Urban and rural household incomes are to grow at the same pace as the overall economy. Labour compensation growth should be consistent with labour productivity growth. The 2013 fiscal budget deficit was set at 2.0% of GDP. The international balances of payments should be improved further. The M2 growth target was set at 13%. Affordable housing targets in 2013 were set at 6.3 million units new starts and 4.7 million units completed, compared to 7 million and 5 million units, respectively, in 2012. NDRC announced FAI growth at 18% in 2013, vs. the target of 16% and actual growth at 20.6% in 2012. Economic restructuring and focus on domestic demand The priority for economic work this year continues to be economic restructuring and quality/sustainability of growth. The government continued to highlight the importance of household consumption, by raising consumers’ spending ability and strengthening household willingness to consume. Meanwhile, the Premier also highlighted that the importance of investment in supporting sustainable economic growth should not be underestimated. China’s ability to invest and its demand for investment remain strong, but it is important to improve the quality and efficiency of investment through various means, including further liberalization of market entry for private investment.

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