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China Economy in January 2015

Source: OPEC 2/2/2015, Location: Asia

In the end of year 2014, Chinese economic activity continues to lose momentum. The flash December PMI reading and the November data released last week, confirm that the economy has been slowing through the 4Q and it seems it will be around 7.0%. The expectation for GDP growth in 2014 remains unchanged at 7.4% to 7.3% but decreases for 2015 from 7.2% to 7.0%.

In terms of GDP revisions in 2013, the National Bureau of Statistics of China (NBS) announced the revised GDP for 2013 on 19 December following the third economic census. After this revision, the size of China's economy in 2013 increased about 3.4% from the previously reported of CNĄ56.9 trillion to CNĄ58.8 trillion ($9.4 trillion). The latest revision is a much smaller increment than earlier upward revisions of 16.8% and 4.4% following the past two censuses of 2004 and 2008, respectively. The NBS also announced that this revision could affect the size of 2014 GDP but would not substantially affect GDP growth, which was 7.4% through September compared to the official target of about 7.5%.

On 18 December, the Chinese premier called for the development of financing guarantees to ease financing burdens on small enterprises and rural farmers. He also called for local governments in China to establish more government-supported financing guarantee institutions with private fund engagement, and to support them by providing favourable taxation and risk compensation. Moreover, officials at the meeting also stressed the importance of improving regulations and preventing risks from financing guarantees.

China will focus on deepening reforms which will have immediate economic benefits in 2015, although the country is notably delaying meaningful implementation of some major items. Chinese policy-makers at the Central Economic Work Conference agreed on nine priority areas for reform in 2015, emphasising the need to ensure that reform is supportive of growth. Those areas include: capital markets, market access for private banks, administrative approval, investment, pricing, monopolies, franchising, and government-purchased services, and outbound investment. Officials also mentioned state-owned enterprise reform but did not include it on the high-priority list. The notice also mentioned establishing a system to evaluate reform and better communicate actual reform measures to the public. It seems all of the items mentioned are hugely important for efficiency. Two of the most important reform areas in China are financial and state-owned enterprise reform.

Foreign direct investment (FDI) in China rebounded into growth territory in November due to improving completed investment in the still relatively fast growing services sector. Cumulative completed FDI in China reached $106.2 billion last month, up 0.7% y-o-y. This compares with a 1.2% y-o-y decline through October. Investment in manufacturing contracted by 13.3% y-o-y compared with a 15.1% contraction in October, while investment in services grew by 7.9% y-o-y compared with 6.6% y-o-y growth in October. Manufacturing and services accounted for 33.8% and 55.1%, respectively, of FDI into China.

China’s 3Q14 foreign exchange reserve number seems to have come in below expectations. Reserve levels actually fell from $3.99 trillion in the 2Q to $3.89 trillion in 3Q. A strong dollar was the main reason behind China’s foreign reserves decline. In the 3Q, the US dollar index appreciated by 7.7%, so the value of non-US dollar assets in the foreign reserves depreciated when exchanged to US dollars. This is primarily a change in book value and the decline does not reflect any real overseas cash outflow. China’s foreign exchange reserves decreased to $3,888 billion in September 2014 from $3,969 billion in August. Foreign exchange reserves in China averaged $722.85 billion from 1980 until 2014, reaching an all-time high of $3,993 billion in June 2014. They hit a record low of $2.3 billion back in December 1980.

Net new financing in China improved slightly in November relative to October, although it remains in line with a trend of weaker overall financing levels and a shift away from shadow banking throughout 2014. According to data issued by the People's Bank of China (PBoC), net new financing last month totaled CNĄ1.15 trillion ($185 billion). This compares to CNĄ662.7 billion in November or CNĄ1.23 trillion in the previous year. Net new shadow banking flows contributed 2% to new financing, compared to large drains earlier this year or nearly one-third of net new financing in the previous year. In late November, the PBoC adjusted benchmark interest rates in an effort to reduce financing costs. But since then, interbank rates have risen and reports indicate that besides mortgages most applied loan rates are not significantly lower.

Moreover, a brief and rapid surge in the equity market is now proving to be speculative rather than sustainable, potentially dulling the net contribution of new financing via stocks during the first weeks of December. Over the past three months, total new financing growth was -16% y-o-y and besides a brief surge during June and July, new financing has been in contraction since July 2013. This largely arises from a large wave of debt maturing in 2014, a headwind which is expected to intensify in 2015.

In terms of trade, exports expanded by 4.9% y-o-y in November compared to 11.5% in October, significantly deeper than the moderate deceleration that was expected. Imports also slowed down substantially, falling from a 4.6% y-o-y expansion in October to a 6.5% y-o-y contraction in November. The largest points of weakness in exports were those regarding Hong Kong, where trade slowed from 24% to 0.9% growth, and to the United States, which slowed from 10.1% to 2.2% growth. Together, those two partners account for about 53% of all Chinese exports.

Slowing import growth hit ASEAN, the EU and South Korean exporters hardest. Slowing export growth will negatively affect real growth primarily through slowing demand for manufactured goods. This makes it likely that industrial output, at least within the manufacturing segment, will show further weakness in November. Given the even steeper fall in import growth (only partly fuelled by lower oil prices), the contribution of net exports to real growth may moderate to a lesser extent. During October and November, China's trade surplus grew over the previous year's level by $17.5 billion on average. This compares to average monthly gains of $22.4 billion during the 3Q.

In December 2014, China's manufacturing purchasing managers index (PMI) stood at 49.95, 0.4 percentage points (pp) lower from last month, slightly lower than the threshold, indicating that the basic trend of China's manufacturing sector is slowing. Non-manufacturing PMI, however, stood at 54.1, up by 0.2 pp over the previous month, and 4.1 pp higher than the threshold, having slightly risen for two consecutive months, indicating that the development trend of China's non-manufacturing sector has risen steadily. Looking at various industries, the non-manufacturing PMI for the services industry was at 53.3, up 0.7 pp over the previous month, indicating that growth in the service industry has accelerated. New orders index stood at 50.5, up by 0.4 pp over the previous month, higher than the threshold, indicating a rise in non-manufacturing market demand, and the growth rate has accelerated.

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