Research Dept. News
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Monthly Report, num 292 - June 2006
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International review - China
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China: in search of a «soft landing»
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China growing at 10% as authorities try to ease economic drive.
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In the first quarter the GDP rose by 10.2% year-to-year. This rate, without being anything new, is even substantially higher than forecasts from here and there for 2006. Nevertheless, news in recent weeks has been dominated by the controversy over lowering the exchange rate for the Chinese currency, the renminbi, and the share issue of the Bank of China available to international investors. This is one of the four large state banks whose solvency constitutes one of the risks for the macroeconomic stability of the country.
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Pressure to appreciate renminbi continues but diplomacy takes precedence.
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Diplomacy has won out and, in making its bi-annual Treasury Department evaluation, the United States avoided branding China as a foreign exchange «manipulator», which has brought some criticism to George Bush. China is the world’s largest holder of foreign reserves with 22% of the global total, thus guaranteeing the growth of its exports. Nevertheless, the Chinese Central Bank recently raised its interest rates and the authorities are in agreement with regard to tightening monetary policy in order to slow its sharp growth. The foreseeable revaluation of the Chinese currency before the end of the year falls within this tighter policy, the only question being when.
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China has trade surplus with Europe and United States but deficit with rest of world.
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In spite of officially having prices under control, with industrial production continuing to grow by 16.6% in April and production of cement and computers moving ahead to 13.4% and 49.7% respectively in the past 12 months, the need to slow down the march of the economy is quite clear. Nevertheless, the history of the Chinese surplus is made up of two quite different parts. On the one hand there is the surplus with the United States and Europe which continues to increase because of the increase of manufactures, and on the other hand there is the growing deficit with the rest of the world because of the importation of raw materials.
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Share issue by Bank of China offers sop to financial sector.
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The other important question for the Chinese economy is the solvency of its financial system, specifically the loans which the four large state banks have been granting to the state conglomerates which possess low credit rating. China’s foreign debt is only 11.9% of the GDP, half that shown by the most solvent economies in Latin America. Nevertheless, if we add those loans, the figures would triple in any conservative estimate. The sale of Bank of China shares for an amount of 11 billion dollars is a sop in this regard and the prices being paid for those shares (double their face value) indicate that prospects are far from being catastrophic. The Chinese banking sector, with 11,000 branches and 200,000 employees, continues to be one of the biggest risks in the Chinese economy and a less-than-soft landing with an abrupt halt to growth could have serious consequences. China’s prudence regarding its currency is understandable.
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