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14-03-2014, 10:03 PM
Chinese softening spurs bearish forecasts
SCOTT MURDOCH, CHINA CORRESPONDENT THE AUSTRALIAN MARCH 15, 2014 12:00AM
Source: TheAustralian
CHINA'S economy stands at a crossroads as the ruling one-party government balances the nation's rapid development and growing world power with intensifying social and environmental concerns.
The National People's Congress, the annual rubber-stamp parliament, concluded this week in Beijing and set the 2014 official growth target at 7.5 per cent.
The target met the financial market's expectations and is the same as last year's.
In 2013, China's economy grew 7.7 per cent, exceeding the target, but the growth rate was the slowest in 14 years.
Financial markets took fright last week when China's Finance Minister Lou Jiwei warned Chinese growth could come in at 7.2 per cent or 7.3 per cent this year, which was "close to the target". The People's Bank of China, the central bank, indicated this week that an interest rate cut could be imminent if the main economic indicators continued to weaken.
Data released this week for the first two months of this year shows that the economy is clearly off to a soft start in 2014.
Retail sales grew at 11.8 per cent, the slowest rate in years, and fixed asset investment, while up 17.6 per cent for January and February compared to the same time last year, was well down from the previous two years.
Factory production rose by 8.6 per cent in January and February, annualised, which was well short of economists' projections of an 12 per cent increase.
Adding to the economic confusion was an 18.1 slump in February exports, compared to a sharp 10 per cent lift in January.
A fluctuating yuan, also known as renminbi, was blamed for the trade slide but the results have economists and investors worried.
The Hong Kong China Enterprise Index, a measure of mainland stocks, is now down 20 per cent since December, placing it officially in bear market territory.
Similarly, iron ore prices have fallen almost 30 per cent in the past few months as Chinese demand rapidly slows.
A number of economists have offered growth forecasts for this year. Bank of America Merrill Lynch economists now predict that first quarter growth will be 7.3 per cent, down from a bullish 8 per cent, while the full-year estimate was cut from 7.6 to 7.2 per cent.
Nomura is also turning bearish on China and cut its first quarter growth outlook from 7.5 per cent to 7.3 per cent. UBS reduced its prediction from 7.8 to 7.5 per cent and Societe Generale is the most pessimistic with a forecast of just 6.9 per cent. Deutsche Bank is sticking to its call of 8.8 per cent.
Premier Li Keqiang, the driving force behind China's economic policy, is adamant that despite clear signs of a weakening, the world's second-largest economy remains in good shape.
However, he told 3000 NPC delegates that the road ahead this year could be rocky.
"We are at a critical juncture where our path upward is particularly steep. The basic conditions underpinning development are undergoing profound changes and deep-seated problems are surfacing," Mr Li told his party cadres.
"Painful structural adjustments need to be made, the pace of economic growth is changing and . . . pressure on the economy remains great."
The rapid softening of China's economy has prompted economists to question whether now is the time for the government to implement some of the ambitious reforms that have been outlined.
The government has indicated it will allow the currency to weaken, start to liberalise interest rates, introduce a retail deposit guarantee scheme and shift the economy from being export-led to consumption-driven.
HSBC's chief China economist Qu Hongbin said most market focus will be on the financial reforms planned by the government. "The financial reforms will continue to gain momentum at a pace faster than many expected," he said.
"The deposit rate is likely to see a further widening of its upper limit this year, a deposit insurance scheme is likely to be introduced in the coming months, paving the way for the full liberalisation of interest rates, likely in 2016.
"The capital account liberalisation also is key to speeding up renminbi internationalisation."
The economic softening and the growing chance that China could miss its official growth target this year, which would be the first time in more than two decades, has prompted speculation that either an interest rate cut or stimulus measures are on the way.
China's main economic policy agency, the National Development and Reform Commission, has this year already approved a 124 billion yuan ($22.39bn) spending package on the national railway network, which analysts say is an effective economic boost.
Goldman Sachs economist Yu Song believes the government will be hesitant in implementing a major stimulus package similar to what it put in place in 2009.
"Chinese policymakers are increasingly reluctant to change cyclical demand management tools as aggressively as before," he said.
"That implies that even when policies are being loosened, it will tend to be done more cautiously, which reduces the likelihood of scenarios such as the past 4 trillion renminbi stimulus package, which we think was a key factor that had allowed China to weather the global financial crisis much better than most other countries."
At the same time as implementing the economic and financial reforms, the government is also facing growing social and environmental criticism, which is threatening growth.
It is under pressure to fix the nation's worsening pollution problem, which is estimated to contribute to almost 500,000 deaths a year.
The government plans to shutter 50,000 small coal-fired furnaces this year and ordered steel production be cut by at least 27 million tonnes.
The environmental reforms put in place, and the results, will be the most closely watched issue in the next few years among China's worried population.
SCOTT MURDOCH, CHINA CORRESPONDENT THE AUSTRALIAN MARCH 15, 2014 12:00AM
Source: TheAustralian
CHINA'S economy stands at a crossroads as the ruling one-party government balances the nation's rapid development and growing world power with intensifying social and environmental concerns.
The National People's Congress, the annual rubber-stamp parliament, concluded this week in Beijing and set the 2014 official growth target at 7.5 per cent.
The target met the financial market's expectations and is the same as last year's.
In 2013, China's economy grew 7.7 per cent, exceeding the target, but the growth rate was the slowest in 14 years.
Financial markets took fright last week when China's Finance Minister Lou Jiwei warned Chinese growth could come in at 7.2 per cent or 7.3 per cent this year, which was "close to the target". The People's Bank of China, the central bank, indicated this week that an interest rate cut could be imminent if the main economic indicators continued to weaken.
Data released this week for the first two months of this year shows that the economy is clearly off to a soft start in 2014.
Retail sales grew at 11.8 per cent, the slowest rate in years, and fixed asset investment, while up 17.6 per cent for January and February compared to the same time last year, was well down from the previous two years.
Factory production rose by 8.6 per cent in January and February, annualised, which was well short of economists' projections of an 12 per cent increase.
Adding to the economic confusion was an 18.1 slump in February exports, compared to a sharp 10 per cent lift in January.
A fluctuating yuan, also known as renminbi, was blamed for the trade slide but the results have economists and investors worried.
The Hong Kong China Enterprise Index, a measure of mainland stocks, is now down 20 per cent since December, placing it officially in bear market territory.
Similarly, iron ore prices have fallen almost 30 per cent in the past few months as Chinese demand rapidly slows.
A number of economists have offered growth forecasts for this year. Bank of America Merrill Lynch economists now predict that first quarter growth will be 7.3 per cent, down from a bullish 8 per cent, while the full-year estimate was cut from 7.6 to 7.2 per cent.
Nomura is also turning bearish on China and cut its first quarter growth outlook from 7.5 per cent to 7.3 per cent. UBS reduced its prediction from 7.8 to 7.5 per cent and Societe Generale is the most pessimistic with a forecast of just 6.9 per cent. Deutsche Bank is sticking to its call of 8.8 per cent.
Premier Li Keqiang, the driving force behind China's economic policy, is adamant that despite clear signs of a weakening, the world's second-largest economy remains in good shape.
However, he told 3000 NPC delegates that the road ahead this year could be rocky.
"We are at a critical juncture where our path upward is particularly steep. The basic conditions underpinning development are undergoing profound changes and deep-seated problems are surfacing," Mr Li told his party cadres.
"Painful structural adjustments need to be made, the pace of economic growth is changing and . . . pressure on the economy remains great."
The rapid softening of China's economy has prompted economists to question whether now is the time for the government to implement some of the ambitious reforms that have been outlined.
The government has indicated it will allow the currency to weaken, start to liberalise interest rates, introduce a retail deposit guarantee scheme and shift the economy from being export-led to consumption-driven.
HSBC's chief China economist Qu Hongbin said most market focus will be on the financial reforms planned by the government. "The financial reforms will continue to gain momentum at a pace faster than many expected," he said.
"The deposit rate is likely to see a further widening of its upper limit this year, a deposit insurance scheme is likely to be introduced in the coming months, paving the way for the full liberalisation of interest rates, likely in 2016.
"The capital account liberalisation also is key to speeding up renminbi internationalisation."
The economic softening and the growing chance that China could miss its official growth target this year, which would be the first time in more than two decades, has prompted speculation that either an interest rate cut or stimulus measures are on the way.
China's main economic policy agency, the National Development and Reform Commission, has this year already approved a 124 billion yuan ($22.39bn) spending package on the national railway network, which analysts say is an effective economic boost.
Goldman Sachs economist Yu Song believes the government will be hesitant in implementing a major stimulus package similar to what it put in place in 2009.
"Chinese policymakers are increasingly reluctant to change cyclical demand management tools as aggressively as before," he said.
"That implies that even when policies are being loosened, it will tend to be done more cautiously, which reduces the likelihood of scenarios such as the past 4 trillion renminbi stimulus package, which we think was a key factor that had allowed China to weather the global financial crisis much better than most other countries."
At the same time as implementing the economic and financial reforms, the government is also facing growing social and environmental criticism, which is threatening growth.
It is under pressure to fix the nation's worsening pollution problem, which is estimated to contribute to almost 500,000 deaths a year.
The government plans to shutter 50,000 small coal-fired furnaces this year and ordered steel production be cut by at least 27 million tonnes.
The environmental reforms put in place, and the results, will be the most closely watched issue in the next few years among China's worried population.