China Economic Outlook

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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3/12

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


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


6/12

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


7/12

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


8/12

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


9/12

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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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)


-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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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.


12/12

China Economic Outlook

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