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Chinese Economy Monitor – Note No.7, Cautious Optimism

(What will be the impact of the global financial and economic melt-down on the Chinese economy? This question should be of interest to the other countries of the South and the South-East Asian region. If the Chinese economy is badly affected, they too are likely to feel the negative consequences of the down-turn in the Chinese economy. Keeping this in view, we have been bringing out a periodic “Chinese Economy Monitor” based on open information. This is the seventh in the series)


Driven by an increase in domestic demand, the Chinese economy has started showing signs of a recovery. The signs are stronger in the interior provinces in Central and Western China where the industries are not dependent on exports than in the coastal provinces where the manufacturing sector is dependent on exports. While domestic demand, encouraged by the Government’s stimulus package of last November, is increasing, exports continue to decline, but the rate of decline is slower. Chinese analysts expect that the decline in exports, at a slower rate, will continue till the end of the year. The exports may start picking up again next year if the US economy improves, but not otherwise. While the Asian Development Bank has been upbeat on the signs of a recovery in China, the World Bank has been more cautious and warned against premature optimism. One of the factors for the caution is that most of the recovery has been due to an increase in Government spending and not to an increase in private investment .Another factor is that some of the data tend to be confusing and contradictory. This has been pointed out even by Chinese analysts. An analysis of the recovery by the official Xinhua news agency points out that while industrial production, driven by an increase in domestic demand, is reported to be going up again, power consumption by the industries continues to go down. It points out that that no explanation for this contradiction has been forthcoming. There are definite signs of a recovery driven by an increase in domestic demand, but are these signs ephemeral or will they be sustained? The Chinese analysts are keeping their fingers crossed. As one studies the way the Chinese leadership has been dealing with the economic down-turn, one is impressed by the refreshing transparency exhibited by the Chinese leadership in dealing with the economic distress.Instead of covering up their economic difficulties, they have been taking their people into confidence, explaining to them the reasons for the difficulties and the action being taken by the Government in dealing with the difficulties and appealing for the understanding and co-operation of the people. President Hu Jintao, Prime Minister Wen Jiabo and other leaders have been touring inside the country extensively and repeatedly for this purpose. Their efforts are showing results as could be seen from the fact that warnings by foreign analysts of extensive social unrest due to large-scale job losses have been belied so far.


2.In a report dated May 4,2009, the Credit Lyonnais Securities Asia (CLSA) based in Hong Kong, which monitors the Chinese economy, reported as follows: “The CLSA China Manufacturing PMI (Purchasing Managers’ Index) rose sharply to 50.1 in April, from 44.8 in the previous month, to signal an expansion of the Chinese manufacturing sector for the first time in nine months. The upward trend observed in the index since posting a survey low last November, suggests that the sector is showing signs of stabilisation. April data pointed to the first rise in production levels at Chinese manufacturers since last July. Where firms signalled an increase in output at their plants, this was commonly attributed to modest gains in new business. Growth of new orders was signalled by April’s survey, following eight consecutive months in which order books have deteriorated. Chinese manufacturers widely reported that improved domestic demand had led sales higher in April. Despite an overall gain in new business, Chinese manufacturers pointed to a modest decline in export sales in April. That said, the latest drop in foreign orders was the least marked for eight months, with panellists commenting that improved demand from some external sources had acted to limit the rate of decline. A modest increase in staff numbers at Chinese manufacturers was recorded in April, which was the first in nine months. Employment growth largely reflected an improvement in order books and higher output requirements. Prices charged by Chinese manufacturers for their finished goods fell further in April, extending the current period of decline to eight successive months. Anecdotal evidence frequently linked the marked drop in output charges to competitive pressures and falling input costs. Average cost burdens faced by Chinese manufacturers declined for the seventh month running in April. The latest reduction was still sharp but much weaker than the rapid declines recorded towards the end of 2008. ”

3.Commenting on the survey, Eric Fishwick, Head of Economic Research at CLSA, said: “China’s Government has been extremely successful in stimulating investment and, combined with a sharp improvement in export orders, this has pushed the PMI back into positive territory in April. The Export Orders Index should soften again in the coming months as, inventories having been brought under control, orders track final demand overseas. However, we hope that firmer domestic demand, as Government spending gains traction, will keep the PMI above 50 in months to come.”

—- CLSA survey dated May 4,2009, available at


4.Addressing a press conference at the end of the annual meeting of the Asian Development Bank (ADB) at Bali in Indonesia on May 5,2009,Haruhiko Kuroda, President of Asian Development Bank, said:”China’s economy is on recovery course and it could recover much earlier than other economies, but of course, at the same time, we have to be very cautious. The South Korean economy had showed signs of recovery, and Japan’s industrial production showed some signs of bottoming out.On the whole, I’m cautiously optimistic that Asia will recover by the end of next year.”

—— Xinhua report dated May 5,2009.


5. China’s domestic demand has started to become more of a driving force for the country’s economic growth than in the past. Signs of a domestic consumption boost are apparent as people are spending more on domestic commodities and the Government plans for more consumption stimulus. Data from the National Bureau of Statistics (NBS) released on May 20,2009, showed that China’s domestic consumption had maintained an upward trend since the beginning of the year. China’s retail sales rose 14.8 per cent in April year on year. It was 0.1 percentage points higher than in March. Rural spending, driven by a Government rebate policy on home-appliance purchases and other commodities, grew by 16.7 per cent in April, which was 2.8 percentage points higher than urban growth. The property and auto market also showed the same trend as China became the world’s largest vehicle market again with more than 1.15 million cars sold in April, up 25 per cent from a year earlier. In the housing sector, China’s real-estate climate index was finally back to growth after ten months of decline. Property sales rose by 17.5 per cent in acreage from a year earlier in the first four months of 2009. “China’s economic structure has started to enter a transforming period to a consumption-driven growth model,” said Li Daokui, Director of the Department of Finance at Tsinghua University. According to Li, economic growth of China’s inland western and central regions, which relied less on export, had exceeded that of the coastal areas in the first quarter, reflecting a strong pull from domestic consumption and investment. Data from regional statistics bureaus had shown that Western and Central China accounted for nine of the 11 provincial areas that had seen double-digit economic growth year on year in the first quarter. Such growth was contrasted by coastal regions whose economy has been mainly driven by export, such as Shanghai, Zhejiang and Guangdong. Gross domestic production (GDP) growth there dropped to three- to- six per cent. “Domestic consumption, together with fixed assets investment, had become the main forces of China’s economic recovery as export continues to weaken,” Li told Xinhua.

— Xinhua dated May 21,2009


6.”With stronger domestic demand, China is very likely to see its economy facing better conditions this year and the Government’s goal of 8 per cent growth will be more than achievable,” said Wang Yuanhong, senior economist and head of the Economic Forecasting Department of the State Information Center at a seminar organized by the All-China Journalists Association. Wang, however, expressed concerns on whether the current economic recovery is sustainable. Xu Lin, Director-General of the fiscal and financial affairs department at the National Development and Reform Commission, said China can achieve its goal of 8 per cent growth this year as it has enough resources to add to Government spending if needed. Many observers suspect this may be an overestimate. The World Bank estimates that a 6.5 per cent growth is more realistic and said the enthusiasm about an economic recovery in China may be “premature” as private investment lags behind Government spending. Most China watchers, however, feel that an 8 per cent growth is required to boost employment.China will also have to identify new growth sectors apart from the saturated automobile and real estate markets, Wang said.

——” China Daily ” dated May 21,2009


7.”With the world keeping a close watch on the Chinese economy for signs of revival, the latest data are sending mixed signals and fueling concern that a recovery, if there really is one, is not on solid footing. When gross domestic product (GDP) and exports were soaring, indicators like electricity use didn’t get much attention. Now, analysts are closely examining every scrap of data. But the problem is, many statistics don’t seem to be giving much insight into economic trends. Old patterns are breaking down and long-standing relationships are breaking apart. Also, many figures for the first two months of 2009 are especially confusing, because the long Lunar New Year holiday fell in January this year, two weeks earlier than in 2008. Many statistics were only released as an aggregate figure for January and February, making it almost impossible to derive accurate year-on-year data. The National Bureau of Statistics (NBS) reported this week that China’s industrial output rose 7.3 per cent year on year in April, at the higher end of analysts’ expectations. But power generation fell 3.55 per cent last month from a year earlier, to 274.76 billion kilowatt hours, according to the State Grid Corp. of China. Since industry consumes about 70 per cent of China’s power, how do economists account for a rise in industrial production accompanied by a decline in power consumption? A breakdown of electricity use sheds a little light on the situation. Electricity consumption started declining on a year-on-year basis last October, when it fell 3.7 per cent, the first drop since 1999.That was also before the Government announced a 4-trillion-yuan($586 billion) stimulus package in November. Power consumption fell 4 per cent to 781 billion kw/hrs in the first quarter from a year earlier. But in March, it fell 2.02 per cent, a little more than half the rate of decline in October. And not all sectors reported a power consumption drop. Consumption of agriculture and tertiary industry rose 5.12 per cent and 7.41 per cent year on year in the first quarter, respectively, according to the China Electricity Council (CEC). Residential use rose 9.88 per cent.But industrial use declined 8.21 per cent, and with exports falling, use in the manufacturing and export hubs of Guangdong and Zhejiang provinces, was “below the national average,” the CEC said. Indeed, the latest industrial output figures for exporters also show a sharp decline last month, down 14.3 per cent to 566.21 billion yuan. An export revival is evidently way off, and that’s bound to delay an overall economic recovery. Zhang Liqun, a researcher with the Development Research Center of the State Council, a government think-tank, told Xinhua that exports would continue declining in the second half but at a slower pace. Zhang said the likelihood of further deterioration in the global economy was “slim” and Chinese exporters were trying to change their product mix.Exports fell 22.6 per cent last month, the sixth monthly drop in a row. Zhang predicted that for the whole year, exports might fall about 10 per cent to 15 per cent. He noted that when looking at the decline in industrial power use, it was important to remember that industrial upgrading was still in progress. The decline of electricity consumption by heavy industry, which accounts for 82 per cent of total industrial power consumption, was the leading cause for the overall decline. China has spent years working to scale back its smokestack industries so it can cut energy intensity by 20 per cent and major emissions by 10 per cent between 2006 and 2010. China plans to eliminate 15 million kw/hrs of power provided by small coal-powered plants, as well as obsolete capacity of 10 million tonnes in the iron industry and 6 million tonnes in the steel industry this year. The first-quarter output growth rate of the six most energy-intensive sectors (iron and steel, nonferrous metals, building materials, petrochemicals, coking and chemicals) fell 12.5 percentage points on average from a year earlier, to 2.3 percent, NBS figures showed. Power use by those sectors also showed large declines: iron and steel (10.24 per cent), chemicals (13.14 per cent) and nonferrous metals (16.78 per cent) in the first quarter, according to the CEC.Meanwhile, efforts to upgrade and rebalance industry showed progress in the first quarter, with tertiary industry’s weight in the economy up 1.6 percentage points and secondary industry’s weight down 1.9 points. Despite discouraging data on the industrial front, policy makers have taken heart from consumer behavior in recent months, which seems to show that the effort to get more economic growth out of domestic demand and less from external factors is succeeding. GDP expanded 6.1 per cent in the first quarter, and the domestic consumption provided the largest share at 4.3 percentage points, accounting for 70.5 percent of the total growth. Investment generated another 2 points, accounting for 32.8 per cent of the total growth, while the decline in exports shaved 0.2 point of the total, according to NBS figures. The economy expanded by 10.6 per cent year on year in the first quarter of 2008. Consumption accounted for 44.4 per cent of total GDP growth, with investment generating another 46.7 per cent and exports providing the remaining 8.9 per cent of the total, according to Zhu Baoliang, an expert with the NBS. China has become the world’s largest vehicle market, with more than 2.67 million cars sold in the first quarter, up 3.88 per cent year on year. Car sales were buoyed by government stimulus policies, said Zhang Yunpeng, an analyst with Beijing-based Huarong Securities. In January, China halved the purchase tax on passenger cars to 5 per cent for models with engine displacements of less than 1.6 liters. More than 1.15 million vehicles were sold last month in China, up 25 per cent in terms of units, while sales in the United States fell 34.4 per cent year on year to 819,540 units, according to the China Association of Automobile Manufacturers. Other NBS figures this week showed that retail sales rose 14.8 per cent in April year on year to 934.32 billion yuan, and the 18.5 per cent monthly vehicle sales growth in terms of sales revenue dwarfed other items by 3.7 percentage points. Private-sector housing sales rose 8.2 per cent year on year in 70 mid-sized and large cities in the first quarter, including Beijing, Shanghai, Guangzhou and other metropolises. Auto and home sales were the most important consumption sectors and their revival showed a trend of consumption recovery in China. This would stimulate the growth of related industries. Boosted by the surge in housing transactions, sales of construction and interior decoration materials rose 10.8 per cent in April from a year earlier, according to the NBS. Zhuang Jian, a senior economist with the Asian Development Bank office in Beijing, told Xinhua that although sales of cars and homes had picked up in recent months, Chinese consumers needed to have more confidence before they would spend and invest more. The Government needed to take new, responsive measures as new situations emerged. Zhuang also noted that contradictory data had been seen from time to time in earlier years in China, when the country’s economy was maturing, and there still might be some difficulties ahead. He added that it had only been half a year since the major stimulus plan was announced and it would be wise to wait for another quarter to see the effects of the stimulus package. “The stimulus has already paid off, with rising investment in government-supported projects. As the weather in the second quarter is more suitable for construction work, we can expect this type of investment would continue to grow,” Zhang said. China’s fixed-asset investment jumped 28.8 per cent to 2.81 trillion yuan in the first quarter. The growth pace accelerated further to 34 per cent in April. Analysts said they expected further gains in shares, car sales and housing transactions in the coming months, but they warned that economic data could still be confusing and disappointing.The ADB forecast in a March report that China’s economy might grow 7 per cent this year. “Judging from current conditions, economic growth might even exceed that forecast,” Zhang said.

—— Xinhua analysis dated May 14,2009


8. Chinese experts have welcomed the remarks made by Timothy Geithner, US Treasury Secretary, on May 20,2009, before the US Senate Banking Committee that China did not manipulate the renminbi for export advantage and had taken steps to enhance exchange rate flexibility. Commenting on his statement, Zhai Peng, economist, Guotai Jun’an Securities, said: “China’s yuan has appreciated by 20 per cent between July 2005 and February 2009. The currency even appreciated slightly against the dollar when most other emerging markets and other currencies fell sharply against the greenback during the financial crisis.Unlike the Asian financial crisis in 1997 when the Chinese Government intervened to hold the renminbi’s value against depreciation, it has become much more market oriented ever since China launched the reform of its foreign exchange mechanism in July 2005.”Li Jianfeng, economist, Shanghai Securities, said: “The fact that Shanghai is to be built into a global financial center by 2020 would greatly drive the yuan to play a bigger international role. This will consequently enable the Government to promote the reform of the foreign exchange mechanism and thus result in a steady appreciation of the currency.” Du Peng, the head of the current account department at the State Administration of Foreign Exchange (SAFE), said that China would give the nation’s banks more price-setting capacity in the exchange of foreign currencies with customers as part of Government efforts to create a more market-oriented yuan. “The foreign exchange regulator will relax limits on exchange rates commercial banks offer customers to meet demand for two-way fluctuations of the yuan,” he said and added that China would also push forward the opening of the capital account and improve the management of current account.”After several years of reform, China’s foreign exchange market has developed quickly and has made great strides,”he said. Zhang Guangping, deputy head of the Shanghai branch of the China Banking Regulatory Commission, said that a series of conditions would have to be met for the yuan globalization trend to gather momentum.”China would have to gradually make the yuan convertible on the capital account; it needs a more liquid foreign exchange market; its bond markets and banking system needs to be more developed; and there has to be proper monitoring of cross-border capital flows,” Zhang said.

—— “China Daily ” dated May 22,2009


9.Addressing a press conference on March 23,2009,Hu Xiaolian, a Vice- Governor of the People’s Bank of China, made the following points: (i).China will continue to buy US Treasury Bonds, viewing the credit risk as low overall.”Investing in American Treasuries, as an important part of our foreign exchange reserve management, will continue.” (ii). China would pay close attention to changes in the value of its Treasury holdings. “US Treasuries are an important part of our foreign exchange reserves. So we naturally care about the security and investment return on US Treasuries.” (iii). She disputed the argument heard in some circles that the US economy and markets were in such deep trouble that the dollar’s global supremacy was under threat. She said China’s view was that studies could begin of a multi-polar global currency system but that the dollar remained the key currency in terms of trade, settlement, payments and pricing. The dollar also dominated financial investment. That was why China, though favoring research into a new multi-currency system, believed the current priority is to step up supervision of the US economy and its financial markets. (iv).The Central Government took long-term factors into account such as the structure of China’s payments and trade; the risks and returns on various currencies; and the liquidity of different currencies. China would not be swayed in determining the make-up of its portfolio by short-term volatility in currency markets.

—“CHINA DAILY” dated March 23,2009.


10.China’s consumer goods industry kept stable development in the first four months this year, thanks to rising domestic demand that offsets falling export, said the Ministry of Industry and Information Technology (MIIT) on May 22,2009. In the past four months, the industrial output of consumer goods grew by 8 per cent. The figures were higher for March and April at 9.8 per cent and 9.2 per cent each. Among its major sectors, textiles, tobacco and pharmaceutical, and light industry grew by 8.1 per cent, 6.6 per cent, 6.1 per cent and 13.8 per cent in industrial output respectively.Industrial output of the four sectors accounted for 30.4 per cent of the national total, statistics from MIIT showed.The light and textile industries, which had been among the ten industries supported by the Government’s stimulus plans, reported shrinking decline in exports.Exports in the light industry fell by 10.9 per cent and exports in the textile industry dropped 8.4 per cent from January to April. However, the decline rates were 4.8 and 7.4 percentage points lower compared to that of the whole industrial export in the same period.

—– Xinhua dated May 22,2009


11.In a statement issued on May 20,2009, the National Development and Reform Commission gave for the first time a break-up of how the stimulus package of US $ 586 million announced by the Government in November last year would be utilised. At the time the stimulus package was announced, some analysts had pointed out that the Government had included in the package the amounts which it intended spending for the relief, rehabilitation and reconstruction of the quake-hit areas of the Sichuan Province.Confirming this, the statement indicated that one-fourth of the stimulus package was going towards the reconstruction in quake-devastated Sichuan province.Another 37.5 per cent of the package is going towards the construction of roads, railways, airports, irrigation and other basic infrastructure across the country. The balance is being utilised for construction of new houses and the improvement of existing houses, village improvement schemes and the improvement of public health services and education. The Central Government is providing 29.5 per cent of the funding for the overall stimulus program, with the balance coming from local governments and other sources.

—- “China Daily” dated May 22,2009


12.China will unveil its first iron ore trade platform called the Rizhao International Iron Ore Trade Center in the Shandong province on May 25, 2009. It will signal that the establishment of the country’s iron ore price index is under way, according to Bai Wenhui, executive of Shandong Huaxin Trade Co Ltd, a major shareholder of the trade center. Jointly started by five local private companies pursuing bulk commodity transaction in Shandong, the center mainly provides electronic commerce services for iron ore suppliers and steelmakers. Its registered capital totals 20 million yuan ($2.93 million). The trade center will offer services including electronic transaction, information exchange, quality inspection, storage, transportation, insurance, and settlement for the two parties in iron ore trading, according to Wang Lei, head of the preparation team for this program.”As the biggest iron ore importer, China has not set an iron ore price index to date. The iron ore trade center will promote orderly iron ore imports and standardize activities of trading parties, and gradually facilitate China to launch its own iron ore price index in the future,” said Bai.Data from China Customs shows that the country imported 443.7 million tons of iron ore in 2008, half of the world’s overall iron ore exports volume over the year, and the imports in January-April period in 2009 hit 188 million tons.

—-Xinhua dated May 22,2009.

( The writer, Mr B.Raman, is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. He is also associated with the Chennai Centre For China Studies. E-mail: )

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