CHINA’S ECONOMIC RISKS

5 SHORT-TERM RISKS FOR THE CHINESE ECONOMY

The Economic Times, June 20, 2011

In the past couple of weeks, market participants have talked about the 'hard landing' risks to the Chinese economy . However, a recent report by Deutsche Bank points out that most of these risks may be short-term in nature and manageable. Here's what it says about these factors.

Power shortage: Its impact on annual GDP will be less than 0.3%. The recent tariff hikes have already reduced the percentage of loss making IPPs to an estimated 20% from 40%. Another 3% rise in tariffs, which is likely, would turn most IPPs to profitable operation.

Weak manufacturing PMI: The manufacturing PMI fell to a 15-month low of 52 in May. However, the non-manufacturing (services) PMI remained at a robust 61.9. As the services sector now accounts for 43% of GDP vs 47% for the industrial sector, the weighted average PMI, remains substantially higher than the historical average. This means that despite some short-term weakness in industrial production growth, the deceleration of the overall GDP should be mild in Q2 and Q3. The reasons for current weakness are short term and manufacturing will recover from September.

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