HU AND THE DOWNWARD PRESSURE

HU SAYS CHINA GROWTH IS FACING ‘NOTABLE DOWNWARD PRESSURE’

Bloomberg News

Bloomberg, September 8, 2012

Chinese President Hu Jintao said a slowdown in exports is putting downward pressure on the world’s second-biggest economy, and he pledged to boost domestic demand and promote more balanced growth.

“Economic growth is facing notable downward pressure, some small and medium enterprises are facing a hard time and exporters are facing more difficulties,” Hu said today at the Asia-Pacific Economic Cooperation CEO Summit in Vladivostok,Russia.

“We have an arduous task of creating jobs for new entrants to the labor force.”

The slowdown is increasing pressure on Hu as China tries to ensure a smooth transition of power to a new generation of leaders at a once-in-a-decade Communist Party Congress this year. Europe’s debt crisis and anemic U.S. growth may hinder a rebound in exports while at home a slump in earnings is deterring companies from spending and banks face rising debts.

Asia’s biggest economy expanded 7.6 percent in the second quarter from a year earlier, the slowest pace in three years, after the government moved to counter inflation and surging property prices after its 2009 stimulus. Exports in July rose 1 percent from a year earlier and shipments in the first seven months rose 7.8 percent, compared with a 23.4 percent rise in the same period in 2011.

UBS AG and ING Groep NV yesterday cut their full-year forecasts for economic expansion to 7.5 percent, which would be the slowest pace in 22 years.

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CHINA’S POLICY DILEMMA

CHINA FACES POLICY DILEMMA IF AUGUST DATA AS BAD AS EXPECTED

Koh Gui Qing

Reuters, September 7, 2012

BEIJING (Reuters) - A deluge of data out of China on Sunday could confirm investors' worst fears that a downswing in the world's second-biggest economy has stretched into a seventh straight quarter, leaving global markets with no respite from the gloom.

But any hope that the data, covering August, will spur Beijing to shore up the economy by cutting interest rates may be misplaced, as inflation is expected to accelerate, albeit from low levels.

The awkward combination of rising prices while growth in exports and factory output wilts puts Beijing in a policy dilemma: relax policy and risk an inflation spike, or stand still and risk a sharper cooldown in activity.

With the Communist Party's once-a-decade leadership change looming, it could happen as early as next month, analysts fear China could fall prey to "policy paralysis".

Despite growing evidence that the economy needs new stimulus measures to regather momentum, policymakers could opt to hold fire out of fear that a surge in prices could stoke social unrest at a politically sensitive time.

Goldman Sachs reflected that pessimism on Thursday by lowering its growth forecasts for China's gross domestic product (GDP) for this year and next.

Other analysts say they will follow suit if Sunday's inflation, factory output, fixed-asset investment and retail sales data for August are as bad as thought.

"Growth is bouncing along the bottom and we haven't seen any convincing signs that a rebound is underway," said Mark Williams, an analyst at Capital Economics in London.

"We haven't had a spurt in lending in the past few months. The government hasn't become more active with fiscal policy. The global economy hasn't picked up."

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CHINA/INDIA: MILITARY

CHINA ON A PEACE OFFENSIVE

Manoj Joshi

India Today, September 6, 2012

China is making special effort to gear up its forces for high-altitude operations.

The Chinese are on a peace offensive now. In keeping with the precision with which they operate, the Chinese have sent three top military officers across the world to convey the message that China's actions in South Asia and the South China Sea should not be seen as threatening by anyone. It is quite another matter whether their interlocutors will receive the message that China wishes to convey. But you can't fault Beijing for not trying.

China's Defence Minister Liang Guanglie came on a four-day official visit to India on Sunday, at the head of a 23 member delegation. The delegation included Yang Jinshan, commander of the Tibet autonomous region's military district. This was the first visit by a Chinese defence minister since 2004, but Liang had visited India as chief of the general staff in 2005.

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CHINA AND SAVINGS

WHY DO CHINESE HOUSEHOLDS SAVE SO MUCH?

Raman Ahmed, Heleen Mees

International Business Times, September 4, 2012

China's monumental savings rate is a popular topic of for policy discussion.1 It has been blamed for the global financial crisis, currency wars (Portes 2010), and the ensuing Great Recession (Mees 2012). But what explains the high savings rate?

The growing body of work on this question has put forward many answers, ranging from the one-child policy to the role of marriage and the weak welfare state (see for example Horioka and Wan 2007, Wei and Zhang 2009, Chamon and Prasad 2010, Jin et al. 2010 and Ma and Yi 2010).

In recent research (Mees and Ahmed 2012), we use a dataset that is more recent and covers a longer time span (1960-2009), including the periods with the most important economic reforms, to find the determinants of the household savings rate in China. To that extent we combine Modigliani and Cao's data with our data, and subsequently use a dummy to account for a level shift in the data for the regressions (see Figure 1). For the analysis, we make use of an error-correction model. Within this specific regression framework we include other exogenous variables next to the variables in the cointegration equation to find the effects on the savings rate. To investigate the presence of cointegration between the variables, we follow the method set out in Boswijk (1994) and use his critical values for the significance of the cointegrating factors.

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SUBDUED GROWTH IN CHINA

CHINA FACTORY SURVEYS SIGNAL ECONOMIC GROWTH STAYS SOFT IN THIRD-QUARTER

Lucy Hornby

Reuters, September 3, 2012

BEIJING (Reuters) - China's vast manufacturing sector has been badly hit by slowing new orders, two complementary surveys showed, a sign that the pace of growth in the world's second-largest economy will weaken well into the third quarter.

The final reading of the HSBC China manufacturing purchasing managers' index (PMI) for August fell to a seasonally adjusted 47.6, its lowest level since March 2009, down from 49.3 in July and slightly below a flash reading of the index late last month.

It followed China's official factory purchasing managers' index (PMI) - one of the early indicators of the state of the economy - which fell to a lower-than-expected 49.2 in August, the National Bureau of Statistics said on Saturday.

It was the first time since November 2011 that the official PMI had fallen below 50, which separates expansion from contraction. Economists polled by Reuters last week had expected it to slip to 50 from 50.1 in July.

The HSBC PMI though has been below 50 for 10 straight months.

"Beijing must step up policy easing to stabilise growth and foster job market conditions," Qu Hongbin, chief China economist at HSBC said in a statement accompanying the survey.

Chief among manufacturers' concerns are the softness in new orders as demand falters, particularly from the euro zone.

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CHINA-SINGAPORE RAIL LINK

CHINA’S RAIL LINK TO SINGAPORE INTENSIFIES EXPORTS RACE IN S-E ASIA

Shivangi Shukla

The Financial Express, September 2, 2012

Even as China's manufacturing activity continues to slide, with its purchasing managers index (PMI) falling below the 50% mark in August, the country has completed a rail link between two of its provinces, as part of a pan-Asian network that eventually stretches up to Singapore, with an eye on improving exports to south-east Asia.

The rail line between Yuxi and Mengzi in Yunan province of China is part of the pan-Asian network that will become operational by December, according to Chinese media, at a cost of $707 million, and has been completed ahead of schedule.

The line connecting China with most countries of Association of South-East Asian Countries (ASEAN) would run from Kunming, Laos, Thailand and Malaysia, to Singapore with alternate routes through Vietnam, Cambodia and Myanmar. This would mean easier transportation of goods and services via rail instead of shipment over the South China sea.

However, Indian business and trade officials are confident the new Chinese rail link will not significantly impact Indian trade with south-east Asia.

Abhijit Das of Center for WTO Studies says the new line will make India's trade with the ASEAN market slightly more difficult. "China is faster in completing infrastructure projects. But India and China can work together to come to a mutually beneficial solution," says Das.

Sanjay Budhia, member of the CII National Committee on Exports and Imports, says the new development in China should not affect India-China relations. "Competition is always welcome but not at the expense of one country having exclusive advantage over the other," says Budhia.

The line now has a total length of 141 km passing through 35 tunnels and 61 bridges, accounting for 55% of its total length.

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CHINA OUTLOOKS

DIVIDED VIEWS ON CHINA OUTLOOK

Fintan Ng

The Star, Septenber 1, 2012

Debates on the possibility of hard landing rage on but is it a cause for concern?

IS China facing a hard landing? The debate rages on but the pessimists seem to have the upper hand now despite the arguments of the likes of emerging markets guru and executive chairman of the Templeton Emerging Markets Group Mark Mobius, who argues that China continues to grow, albeit at a slower pace.

Recent economic indicators and corporate earnings suggest that despite the push for domestic demand to bolster the economy, external challenges have taken a toll on economic growth and outlook.

China posted a second-quarter gross domestic product (GDP) growth of 7.6% year-on-year, a three-year low. The official growth estimate for the year is for GDP to grow 7.5%, marginally lower than the 8% estimated earlier in the year.

The pace of growth, while better than the United States or eurozone, is where the crux of the hard landing/soft landing argument lies. What is hard or soft landing in the spectrum of growth?

Pessimists believe that China's economy will continue to slow but have not made a case or a definition for a hard landing. Is the definition of a hard landing anything below the official estimate for this year or is it anything below the double-digit growth of recent years or perhaps below-par growth which will not be able to support long-term trend growth?

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