china economic outlook
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8/14/2019 China Economic Outlook
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c h a p t e r 1 Poitica Outookc h a p t e r 2 Economic Outook
SWOT Anaysis
StrengthsChina is the fastest-growing major economy in the world, and this has lifted hundreds of millions
of people out of poverty over the past generation.
China has a massive trade surplus, and its US$1.9trn of forex reserves serve as a major cushion
against external shocks.
Chinas economic policy-makers are committed to continuing their gradual reform of the economy.
WeaknessesChinas economy has been growing too fast for its own good. This has led to major imbalances,
and environmental degradation.
Chinas dependency on exports to boost growth has made it vulnerable to the global recession.
Private consumption remains weak, at less than 0% of GDP.
The close relations between provincial leaders and local businesses are fostering corruption, and
are making it harder for the central government to enforce its policies.
Opportunities
Chinas economic growth is slowly becoming more broad based, with domestic consumption likelyto rise in importance vis-a-vis exports, thanks to a middle class of 00mn-00mn people.
Chinas ongoing urbanisation will be a major driver of growth, and new cities will emerge in the
less-developed inland provinces. The UN forecasts Chinas urban population rising from 0% in
00 to % in 00, a gain of 00mn people.
As China moves up the value chain, it will develop its own global brand name companies, fostering
innovation and growth.
ThreatsThere are fears that the global recession of 008-10 will mean an end to Chinas double-digit
growth rate.
Despite a halt to the appreciation of the yuan currency, the recession is leading to job losses in
Chinas export sector, and thus increasing social instability.
Relatively high food price ination could become structural, as farmland is lost to industry or pol-
lution, and farmers migrate to cities.
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ECONOMIC OUTlOO
Economic Activity
Q408 GDP Data Con Ou FasAs anticipated, Q408 GDP data conrmed that China is far from immune from the unfolding
global recession, with real growth dropping to 6.8% y-o-y. This marked the weakest out-turn in seven years and dragged full-year growth to 9.0%, a sharp decline from the 13.0%
recorded in 2007 and the rst time since 2002 that the worlds third largest economy had
failed to register double-digit headline growth. With things expected to get worse before
they get better, we are anticipating further grim news from China in H109, and reiterate
our below-consensus 5.6% growth forecast for the year.
Indeed, trade data for December revealed that both imports and exports suffered a second
consecutive month of contraction, with exports falling by 2.8% y-o-y, accelerating from
the 2.2% decline recorded in November, while imports plummeted by 21.3% y-o-y having
dropped by 17.9% in the previous month. Notably, Exports to the US (which purchased17.7% of Chinas total exports in 2008) fell by 4.1% y-o-y in December to compound
Novembers 6.1% decline, while shipments to the EU (which, with a 20.5% share, was
Chinas single biggest export destination in 2008) fell 3.5% y-o-y in December after re-
maining at in the previous month.
We have recently revised down our 2009 growth forecasts for both the US and the EU from
-2.0% and -1.6% to -2.3% and -2.5%, respectively implying that export growth is likely to
remain in negative territory (or at least remain very weak) over the near term. Meanwhile,
imports are likely to follow suit as commodity prices continue to trend lower, demand for
inputs for manufacturing exports decline and domestic demand remains sluggish.
Dostic Dand Unlikly To Co To Th rscuTo be sure, although not as bleak as recent trade data, leading indicators of domestic
demand are painting an increasingly bearish picture. Retail sales grew by 19.0% y-o-y in
December, and although this is still a strong number, it nevertheless marked a third con-
secutive month of slower growth having reached 23.2% in September 2008. Meanwhile,
urban xed asset investment (FAI) growth slowed to 26.1% in 2008. Once again, while
this is still an impressive outturn, December nonetheless represented a third straight month
of slower growth after peaking at 27.6% in the January-September period. Moreover, realestate investment continued its rapid slide in December, with growth decelerating for a
sixth month in a row to 20.9% y-o-y, having hit a record high of 33.5% in June.
Property price growth dipped into negative territory in December, and leading property
market indicators suggest that the slowdown has further to run. The quantity of land pur-
chased an indicator for future property development fell by 5.6% y-o-y in November,
according to the most recent data available from the National Statistics Bureau, compounding
the previous months 2.6% decline, while growth of oorspace of commercial buildings
sold spent a ninth straight month in negative territory after it contracted by 16.5% y-o-y in
November. Perhaps most worryingly though is the fact that despite growth of oorspace ofcommercial buildings under construction continues to slow (it registered growth of 18.7%
i N b d f k f 32 1% i F b 2008) i i ill di
BMI VIEw
Economic growth dipped to a seven-year l
of 6.8% in Q408, dragging full-year growth
2008 to 9.0% a sharp decline from the 13.
recorded in 2007 and the rst time since 20
that the worlds third-largest economy h
failed to register double-digit headline grow
However, the bad news does not stop the
Recent macroeconomic data has shown t
economic activity continues to cool, and we
not foresee any turnaround in fortunes for
Chinese economy until the second half of 20
at the very least, highlighting that is more likto be 2010 before a recovery gets under w
With this in mind, we expect real GDP grow
to slow to 5.6% in 2009.
Worst Outturn In Seven YearsReal GDP (chg % y-o-y)
Souce: National Bureau of Statistics
Q10
1
Q20
1
Q30
1
Q40
1
Q10
2
Q20
2
Q30
2
Q40
2
Q10
3
Q20
3
Q30
3
Q40
3
Q10
4
Q20
4
Q30
4
Q40
4
Q10
5
Q20
5
Q30
5
Q40
5
Q10
6
Q20
6
Q30
6
Q40
6
Q10
7
Q20
7
Q30
7
Q40
7
Q10
8
Q20
8
Q30
8
Q40
8
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CHINA Q2 2009
This means that the gap between supply and demand is rising at a rapid rate, implying that
property prices will remain subject to strong downward pressure throughout H109. Given
that real estate investment accounts for approximately 20% of all urban FAI, and that FAI
in turn accounts for more than 40% of GDP, this bodes very ill for headline growth.
Furthermore, with investment in manufacturing contributing an even bigger slice to urban
FAI than real estate, there seems little reason to hold out hope that FAI growth in 2009
can maintain anywhere near the 20%+ levels witnessed during Chinas recent boom pe-
riod in 2009. Although industrial output growth rebounded slightly in December from the
record low of 5.4% y-o-y registered in November, it still remained lacklustre at just 5.7%.
To put this in context, full-year average industrial output growth in 2007 was 18.0%, and
was 16.1% in H108, and ofcial sources have been quoted as saying that factory output
needs to grow at at least 12% if the government is to meet the 8% growth target which is
widely seen as the minimum required to ensure sufcient job creation. Meanwhile, year-
to-date growth in secondary industry slowed to 9.3% in Q408, according to the National
Bureau of Statistics, marking a sixth straight quarter of decelerating growth after peakingat 13.7% in Q207.
Can The Government Save The Day?In view of the increasingly dismal outlook for the Chinese economy, we are expect-
ing further aggressive monetary easing and scal stimulus to be rolled out as Beijing
tries to avoid a doomsday scenario. Indeed, given that producer price ination dipped
into negative territory on a y-o-y basis in December, contracting by 1.1%, and that
consumer price ination which slowed to just 1.2% y-o-y in the same month is
likely to follow suit in Q109, the Peoples Bank of China (PBoC) certainly has scopeto slash interest rates.
However, given the lagged effects of any such moves, and the immediacy of Chinas
problems, we fear that they will not have the desired effect. Indeed, with approximately
CNY3.1trn of Chinas mammoth CNY4trn (US$585bn) scal stimulus package ear-
marked to be spent on infrastructure projects in their various guises, it seems difcult
to see how Beijing will be able to successfully front-load its additional spending given
the length of time required to put construction projects into action. Thus, although were
not saying that government initiatives will have no effect, we maintain our 5.6% growth
forecast for 2009.
TABlE: ECONOMIC ACTIVITY
2005 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f
Nominal GDP, CNYbn [1] 18869.2 22164.8 24973.5 26844.5 28634.6 30518.2 32859.8 35415.2 38063.8
Nominal GDP, US$bn [1] 2303.60 2780.90 3285.00 3864.90 4170.50 4522.30 5095.90 5712.90 6344.80
Real GDP growth, % change y-o-y [1] 10.4 11.9 13.0 9.0 5.6 6.8 7.9 7.6 7.6
GDP per capita, US$ [1] 1762 2116 2459 2870 3072 3305 3696 4111 4531
Population, mn [1] 1307.60 1314.50 1336.10 1346.80 1357.50 1368.20 1378.90 1389.60 1400.30
Industrial production index, % y-o-y, ave [1] 16.3 16.4 18.0 12.9 6.9 9.0 11.1 10.6 10.1Unemployment, % of labour force, eop [2] 4.2 4.1 4.0 4.2 4.8 4.4 4.4 4.3 4.2
Notes: e BMI estimates f BMI forecasts Sources: 1 National Bureau of Statistics BMI 2 National Bureau of Statistics
Downturn Has Further To RunProperty Sector Leading Indicators (Top) and Prices
(Bottom), % chg y-o-y
Source: National Bureau of Statistics, National Developmentand reform Commission
-40
-30
-20
-10
0
10
20
30
40
Oct-05
Dec-05
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Feb-07
Apr-07
Jun-07
Aug-07
Oct-07
Dec-07
Mar-08
May-08
Jul-08
Sep-08
Floorspace Of Commercial Buildings Under ConstructionLand Area PurchasedFloorspace Of Commercial Buildings Sold
-2
0
2
4
6
8
10
12
14
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
All Property
New Homes
Existing Homes
Non-Residential
Consumer Price Growth To Follow
Producer Prices Into Negative TerritoryConsumer & Producer Price Ination (%)
Source: National Bureau of Statistics
-2
0
2
4
6
8
10
12
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Consumer Price Inflation
Producer Price Inflation
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ECONOMIC OUTlOO
Beijings Nightmare Coming TrueOur concerns appear to be increasingly echoed by government ofcials, with Liu Mingkang,
chairman of the China Banking Regulatory Commission, describing the task of meeting
the ofcial 8% growth target as exceptionally arduous, and central bank governor Zhou
Xiaochuan also admitting that downside risks exist. Moreover, the State Information Centre
(SIC), a government think tank, has said the FAI may decelerate in 2009 despite Beijings
ambitious spending plans. According to the SIC, the government funded only 3.88% of
FAI projects in 2008, with 77.43% nanced by companies own funds and the rest by bank
loans and foreign investors. Amid the current global economic climate, Chinese and for-
eign companies alike are very unlikely to be able to increase capital spending to the extent
required. The SIC has said that while local governments were eager to start new projects,
most planned investments would stay on the drawing board without corporate support.
More worryingly, however, are previous comments made by Liu which suggested that
growth below 7% could trigger social unrest. We are now already at this point, and withmounting anecdotal evidence and ofcial data highlighting the rapidly weakening of the
countrys job market, social unrest is worryingly close to becoming a reality. Indeed, an
estimated 10 million migrant workers have reportedly already lost their jobs, while the
latest purchasing managers index revealed that employment prospects weakened further
in December with the employment sub-index falling to 43.3 from 44.3 in November.
While many other governments will be facing similar pressures, the lack of any outlet for
citizen dissatisfaction in communist-ruled China makes the current situation a particularly
volatile situation.
Fiscal Policy
Fiscal Shotfall To Widn Shaply In 2009Having recorded a surplus of CNY1.2trn in the rst eleven months of 2008, Chinas
full-year budget balance plunged into the red in December as the combined spending of
central and local governments climbed by 30.8% y-o-y to CNY1.66trn (US$243bn). With
revenues lagging way behind at CNY325bn (a meagre 3.3% increase over the equivalent
year-ago period), a CNY111bn full-year decit was recorded, reversing the CNY154bn
surplus registered in 2007.
While this was equivalent to a still very manageable 0.4% of GDP, it nonetheless represents
a sharp reversal in scal policy direction. Since reaching a multi-year high of 2.6% of GDP
in 2002, Chinas scal decit had narrowed in each of the following four years, and actu-
ally reverted into surplus for the rst time in over 18 years in 2007. Thus, the 2008 budget
gure signies an end to scal consolidation and the dawning of a far more aggressive
approach to scal policy. Indeed, Decembers data underscores Beijings intent to throw
all its available resources at propping up rapidly sagging growth, and with this in mind,
we expect to witness a sharp widening of Chinas budget decit in 2009.
China has already announced a CNY4trn scal stimulus package aimed at boosting eco-
i ti it th t t d P i Mi i t W Ji b t d i
BMI VIEw
Chinas scal balance swung sharply into de
in December 2008 as Beijing ramped up spe
ing in the nal weeks of the year in an attem
to counter the ongoing economic slowdow
With economic activity forecast to slow furt
in 2009, Chinas scal shortfall is expected
widen from the 0.4% of GDP estimated
2008 to 2.6% in 2009, as the government tr
to spend its way out of the current crisis. Me
while, with such a heavy focus on infrastruct
spending, we continue to question the efca
of the governments CNY4trn (US$585bn) s
stimulus package.
Grim Prospects For EmploymentPurchasing Managers Index Employment Sub-In
Source: National Bureau of Statistics
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
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CHINA Q2 2009
the Financial Times as recently as February 1 saying that Beijing may take further new,
timely and decisive measures. Indeed, with real GDP growth slowing to a seven-year low
of 6.8% y-o-y in Q408, and 20 million migrant workers having lost their jobs, according
to Chen Xiwen, the director of the Ofce of the Central Rural Work Leading Group, it
appears that further scal stimulus is very much on the cards.
At the same time, the Chinese government must contend with slowing revenue collections.
Among a number of moves to ease the tax burdens on its citizens, Beijing has cut income
and stock-trading taxes, lowered taxes on property transactions, scrapped the withhold-
ing tax on interest income and raised rebates for exporters, while taxes gathered from
corporates also continue to weaken as corporate prots deteriorate in line with softening
economic activity.
Against this backdrop, we are forecasting Chinas scal decit to widen sharply in 2009, to
CNY740bn (or 2.6% of GDP), as revenue growth slows from 19.4% to 17.0% and expenditure
growth moves in the opposite direction, accelerating from 25.3% to 26.8%. However, withrisks to government spending weighted to the upside, and risks to revenues rmly skewed
to the downside, we highlight that China could be facing a far larger shortfall.
Nonetheless, we remain condent that Chinas budget position will remain within man-
ageable parameters. The central government has been running a fairly conservative scal
policy in recent years, meaning that scope to expand expenditure exists, even at a time
when revenues are forecast to suffer. Indeed, central government debt has been estimated
at around 18% of GDP at the end of 2008, suggesting that additional borrowing would be
a viable option to fund the anticipated rise in government spending. Moreover, Wen has
said that a plan to use of some of Chinas foreign currency reserves for domestic purposesis under discussion, and with more than US$1.9trn at its disposal, Beijings reserves should
provide an ample source of extra funds.
efcacy Of Stiulus Packag In QustionThe recently published breakdown of Chinas mammoth scal stimulus package has re-
vealed that, in line with our expectations, the majority of the spending will be channeled
into infrastructure projects, with 45.0% of the CNY4trn package to be spent on railways,
highways, airports and power grids, 25.0% to be spent on post-disaster reconstruction and
9.3% on rural development and infrastructure. This equates to approximately CNY3.1trnbeing spent on infrastructure projects in their various guises.
Although this will have signicant positive effects on employment and the construction
industry over the near term, it is, as we have previously suggested, likely to have a far more
TABlE: FISCAl POlICY
2004 2005 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f
Fiscal revenue, CNYbn [1] 2639.6 3164.9 3873.1 5132.2 6130.0 7172.1 8319.6 9318.0 10417.5 11594.7
Fiscal expenditure, CNYbn [1] 2848.7 3393.0 4021.3 4978.1 6240.0 7912.3 9075.4 9910.4 10871.7 11893.6
Budget balance, CNYbn [1] -209.0 -228.1 -148.2 154.1 -110.0 -740.2 -755.8 -592.4 -454.2 -298.9Budget balance, % of GDP [1] -1.3 -1.2 -0.7 0.6 -0.4 -2.6 -2.5 -1.8 -1.3 -0.8
Notes: e BMI estimates f BMI forecasts Sources: 1 National Bureau of Statistics BMI
Consolidation Efforts Taking A BackseatBudget Balance (% of GDP)
e/f = BMI estimate/forecast; Source: Ministry of Finance
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
2003
2004
2005
2006
2007
2008e
2009f
2010f
2011f
2012f
2013f
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ECONOMIC OUTlOO
muted impact on growth at least in the short term than if the money were to be chan-
neled into tax cuts or subsidies, which would have a far more direct impact on consumers.
Moreover, with such a vast amount being thrown at boosting infrastructure, there is a not
insignicant risk of building bridges to nowhere (i.e. projects which serve little purpose
upon completion, and whose only raison dtre is to boost short-term employment). While it
is true that China may be able to make those nowheres into somewheres, given the vast
number of underdeveloped settlements outside of the eastern seaboard, the construction of
bridges to nowhere would nonetheless provide substantial reason for concern.
Indeed, it could suggest that policymakers in Beijing appear to have learnt little from
the ongoing global economic meltdown. Chinas growth model of aggressively boosting
xed investment and exporting its excess capacity, which has yielded such phenomenally
successful results over the past decade, is ultimately unsustainable a fact underscored
by developments witnessed over the past year. To be sure, if China is to achieve a more
balanced growth path over the longer-term horizon, it must shift its focus away from its
external sector and towards building a base for private consumption. However, on thisfront, precious little progress has been made in recent years.
A better option for long-term economic development would be to spend more on building
adequate health and social safety systems. One reason often cited for Chinas high savings
rate is that people need to squirrel away money for medical treatment or possible retrench-
ment, given that loss of work has often meant a loss of the social benets that come with
the job. Thus, in the long term, China could increase consumption by providing a safety
net that would obviate the need for such high savings. However, with only 1.0% of the
proposed scal package being spent on health, culture and education, such a policy route
appears to be off the table for the time being.
Moreover, this is merely one of our concerns. The actual size of the planned additional
spending is still under debate, as is the source of nancing for the additional spending,
while inherent corruption also remains a key concern. Thus, we remain sceptical as to the
ability of Beijings announced scal stimulus package to rescue the economy from its
current doldrums.
Exchange Rate PoicyYuan To Fall by 1% In 2009With the deluge of increasingly dismal data ooding out of China showing few signs of
stopping any time soon, we are forecasting the yuan to end 2009 around 1% lower than its
2008 close, at CNY6.9000/US$. Looking ahead to 2010, however, we are anticipating the
yuan to once again resume its appreciatory trend as economic growth momentum begins to
pick up. Yet, we do not believe that the unit will be able to match the 6.9% gains witnessed
in both 2007 and 2008, and are subsequently forecasting appreciation of approximately
4.5%. This will see the currency end 2010 at CNY6.6000/US$
The once enormous upside pressure on the yuan, stemming from persistently colossal trade
l d i it l i h ll b t di d i b t t
BMI VIEw
In view of rapidly deteriorating growth prospe
in China, we expect the yuan to remain within
CNY6.8000-6.9000/US$ range, as thePeopl
Bank of China (PBoC) ensures the unit rema
range-bound in order to promote price sta
ity and bolster the all-important export sect
However, we emphasise the fact that a den
weakening bias remains in place.
Time Lag Will Be A Key IssueFiscal Stimulus Package Breakdown (%)
Source: National Development and Reform Commission
Railway
Highway
Airports
Power G
45.0
Affordable
Housing, 7.0
Rural
Development
and
Infrastructure
Projects, 9.3
Post-DisasterReconstructio
n, 25.0
Health, Cu
and
Education,
Independent
Innovation, 4.0
Ecology and
Environment,
8.8
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CHINA Q2 2009
bust in China. The years of persistent double-digit growth now look rmly behind us as the
collapse of the Western consumer continues to weigh on demand for Chinese shipments,
which in turn is seeing investment which has been rmly focused on the export sector
during Chinas recent boom period take a tumble. Despite Beijings considerable efforts
which have included the unveiling of a mammoth CNY4trn (US$585bn) scal stimulus
package and 216bps worth of interest rate cuts since September 15 2008 we remain
sceptical of their efcacy, and as such we have once again revised down our 2009 growth
forecast. Having previously been anticipating a below-consensus expansion of 6.8%, we
have become even more bearish and are now expecting growth to dip to just 5.6%.
Indeed, recent data releases have underpinned our view. Exports fell 2.8% y-o-y in Decem-
ber to compound the previous months 2.2% decline, which marked the rst since since
February 2002 and the biggest drop since April 1999. Meanwhile, imports plunged by a
mammoth 21.3% in December having dropped 17.9% in November, and while plummeting
commodity prices will to an extent have been responsible, the dramatic fall nonetheless
underscores not only weakening domestic demand but also a dearth of demand for inputsfor manufacturing exports. In addition, industrial output growth slowed to 5.4% y-o-y in
November, down from 8.2% in October, marking a fth straight month of deceleration and
representing the worst monthly reading excluding the months of January and February
when the Lunar New Year distorts industrial output data since the monthly data series
began in 1999. Furthermore, growth in urban xed asset investment decelerated for a third
consecutive month, slowing to 26.1% y-o-y in the January-December period, from 26.8%
in the rst 11 months of the year, having peaked at 27.6% in September.
Finally, there is increasing anecdotal evidence that unemployment and factory closures are
both rising at a rapid clip. Reportedly, more than 60,000 businesses closed down in 2008,while in the province of Shandong alone, nearly 700,000 people lost their jobs. With the
liklihood that y-o-y ination is poised to turn negative in Q109 also thrown into the mix,
there appear few good reasons to expect anything other than a weaker yuan in 2009.
Risks To OutookIf anything, we suggest that risks to our CNY6.9000/US$ forecast are weighted to the
downside. If growth really slows sharply, and in particular too far below the governments
8% target, the Peoples Bank of China (PBoC) could allow the unit to drop further in
order to try to boost export competitiveness and counter the negative effects of deation.Indeed, a one-off devaluation still cannot be completely discounted, although we stress
that this remains a low-probability scenario.
To be sure, a competitive devaluation of the yuan would be a very risky strategy that would
not only risk drawing the ire of the rest of the world and the US and its new president in
particular but also potentially provide the catalyst for a series of regional devaluations and
an ensuing trade war. Thus, we continue to believe that the political implications of letting
the currency fall too far will continue to prevent China from pursuing such a policy.
Rangebound For Now, But Risks
Weighted To the DownsideExchange Rate, CNY/US$
Source: BMI
6.6
6.8
7.0
7.2
7.4
7.6
7.8
8.0
8.2
8.4
May-05
Jul-05
Sep-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
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ECONOMIC OUTlOO
Baance Of Payments
BoP Position To Remain SecureChinas all-important external sector ended 2008 on a distinctly sour note after trade data
for December revealed that both imports and exports suffered a second consecutive monthof contraction. Exports fell by 2.8% y-o-y, accelerating from the 2.2% decline recorded
in November, while imports endured a similar fate, plummeting by 21.3% y-o-y having
dropped by 17.9% in the previous month. These developments saw China post a trade sur-
plus of US$39.0bn in December, just shy of Novembers all-time high of US$40.1bn, and
brought the full year surplus to a record US$295.5bn, 12.7% higher than the US$262.2bn
recorded in 2007.
Exports to the US (which purchased 17.7% of Chinas total exports in 2008) fell by
4.1% y-o-y in December to compound Novembers 6.1% decline, dragging the full-year
growth gure down to 8.4%. This marked a notable decline from the 14.4% expansionrecorded in 2007 and a fourth consecutive year of decelerating export growth to the
US, but, most signicantly, it marked the rst time since 2001 that growth had come in
below double digits.
Meanwhile, exports to the EU (which, with a 20.5% share, was Chinas single biggest
export destination in 2008) fell 3.5% y-o-y in December after remaining at in the previous
month. However, most signicantly on this front, the full-year growth gure plummeted to
19.5% from a whopping 49.1% in 2007. With the eurozone forecast to contract by 2.5% in
2009, this gure is likely to fall even further over the coming year. Finally, having already
plunged by 20.1% y-o-y in November, exports to Hong Kong (Chinas third largest exportdestination with a 13.4% share) tumbled 15.4% in December.
This latest data merely underscores our bearish view on the worlds fourth largest economy,
and adds weight to our sharply below-consensus 2009 growth forecast of 5.6%. Indeed,
although plummeting commodity prices will to an extent have been responsible for the
sharp drop in imports, the dramatic falls witnessed in both November and December also
underscore not only weakening domestic demand but declining demand for inputs for
manufacturing exports. Moreover, with demand for Chinese goods continuing to weaken
across its key export markets, the current trends appear to have further to run.
Indeed, we are forecasting growth of total exports to slow from the 22.3% clip estimated in
2008 to just 12.0% in 2009, with services buoying the headline gure as growth in goods
exports slows from 21.7% to 10.9% over the same time horizon. Meanwhile, although
import growth is also forecast to slow in 2009, it will nonetheless outpace that of shipments.
Imports of goods are forecast to rise by 16.8% in 2009, down from 21.9% in 2009, while
imports of services are expected to increase by 19.3%, slowing from an estimated 30.7%
rise recorded in 2008. These developments will see Chinas balance of goods shrink from
an estimated 9.9% of GDP in 2008 to 8.6% in 2009, while the overall trade balance will
fall from an estimated 9.5% of GDP to an anticipated 8.3%.
Although still-strong net transfers and income from abroad will continue to buoy the overall
h k f f ill d Chi l l
BMI VIEw
Chinas current account will suffer at the han
of the global recession, with the countrys ove
trade balance shrinking from an estima
9.5% of GDP in 2008 to 8.3% in 2009. This
see Chinas current account surplus fall fr
an estimated 11.8% of GDP to 10.9% o
the same time horizon. Meanwhile, mount
concerns over capital ight also threaten
countrys nancial account. Nonetheless,
remain condent that despite the mount
downside risks, Chinas overall balance of p
ments position will remain secure.
Trade Surplus Has Reached A PeakTrade Balance (% of GDP)
e/f = estimate/forecast; Source: National Bureau of StatisBMI
0
1
2
3
4
5
6
7
8
9
10
2003
2004
2005
2006
2007
2008e
2009f
2010f
2011f
2012f
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8/14/2019 China Economic Outlook
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CHINA Q2 2009
from the 11.8% of GDP gure estimated for 2008 in 2009. However, Chinas current ac -
count will nonetheless remain in healthy surplus at 10.9% of GDP.
risk Of Capital Flight rplacs Concns Ov Hot monyWhile Chinas current account position will remain secure, the prospects for its nancial
account remain far less certain. In the rst half of 2008, hot money inows were perhaps
the single biggest issue facing the Chinese authorities as they attempted to prevent an
economy accelerating from already double-digit growth from overheating. With the yuan
seemingly only heading in one direction, speculators were falling over themselves to buy
the Chinese currency in the rm belief that they would be making a risk-free prot as the
undervalued unit was allowed to appreciate in order to help curb mounting inationary
pressures and cool rampant economic expansion. Indeed, the yuan gained 6.4% against the
dollar in the rst six months of 2008, up from a 4.1% rise in the previous six months and
a 2.6% increase in H107, while the spread of spot CNY over 12-month CNY non-deliver-
able forwards (NDFs) a leading indicator of investor sentiment towards the Chinese yuan spiked to a record high of 0.819 on March 13 2008.
While it is nigh on impossible to get hold of accurate gures reecting the actual amount of
speculative capital entering China, Michael Pettis and Logan Wright, writing in the Financial
Times in July 2008, suggested that the trade surplus, FDI and interest on Chinas reserves
accounted for as little as 39% of the countrys reserve accumulation in the January-May
2008 period. This implies that hot money inows totalled almost US$165bn in the rst
ve months of 2008. Now, however, as economic boom rapidly turns to bust, the Chinese
authorities are in fact facing the opposite problem: potentially damaging capital ight.
Indeed, Hu Xiaolian, the head of the State Administration of Foreign Exchange (SAFE),
has warned that China faces a threat of abnormal cross-border capital ow because of
global nancial tumult, cautioning that more money owing out of the country could in -
crease the risk of liquidity strain in the economy. In addition, October 2008 saw Chinas
foreign exchange reserves fall for the rst time since December 2003 when they dropped
to US$1.880trn, having stood at US$1.906trn in September.
In a sign of how concerned Beijing is becoming over this issue, the Ministry of Commerce
has proposed in new draft rules that Chinese companies will have to seek ministry ap-
proval if they want to invest US$100mn or more overseas. Under the planned new rules,which would replace the existing ones promulgated in 2004, companies may also need the
ministrys approval if they want to invest in countries that have no diplomatic relations
with China, foreign infrastructure projects or highly risky countries or regions. Existing
rules require Chinas central government-controlled companies to apply for the ministrys
approval if they want to invest overseas, while other rms need only ask for the permis-
sion of the ministrys provincial bureaus. These rules do not restrict applications by any
monetary threshold.
In a statement made on its website, the Ministry of Commerce said that the regulations
are drawn up to promote and regulate the development of overseas investments, after afew major Chinese companies reported big book losses on investments abroad. However,
it th t f di t f it l t ti h i th i
Export Weakness To Weigh On C/AExports (% chg y-o-y)
Source: National Bureau of Statistics
-10
0
10
20
30
40
50
60
Jan
-05
Apr-05
Ju
l-05
Oct-05
Jan
-06
Apr-06
Ju
l-06
Oct-06
Jan
-07
Apr-07
Ju
l-07
Oct-07
Jan
-08
Apr-08
Ju
l-08
Oct-08
C/A To Remain In Healthy SurplusCurrent Account (% of GDP)
e/f = estimate/forecast; Source: National Bureau of Statistics,BMI
0
2
4
6
8
10
12
14
2003
2004
2005
2006
2007
2008e
2009f
2010f
2011f
2012f
2013f
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8/14/2019 China Economic Outlook
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ECONOMIC OUTlOO
slowing at an alarming pace is also likely to be a prime motive. Indeed, the draft rules also
deleted an existing provision that said that the state supports and encourage companies with
various sorts of advantages and ownerships to go abroad to invest and establish new rms,
underscoring Beijings apparent policy shift. The ministry said the new rules would take
effect after their formal publication, but it did not say when this would happen. However,
Chinese authorities typically issue new rules within a month after seeking public feedback,
which in this case ran until January 20.
While the move will not necessarily stop money leaving China, it nonetheless underscores
Beijings growing concerns, and highlights the possibility that a more draconian clampdown
could be implemented going forward. Moreover, it suggests that Chinas secure balance of
payments position may be under threat. However, given that China has posted an average
nancial account surplus in excess of US$40bn since the end of the Asian nancial crisis,
and that its current account is forecast to stay in healthy surplus, we remain condent that
the countrys overall balance of payments position will continue to be secure throughout
the global recession.
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8/14/2019 China Economic Outlook
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