Research Dept. News
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Monthly Report, num 352 - December 2011
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International review - China
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China: inflation and fine adjustments
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The CPI slows up to 5.5%; the food CPI to 11.9%.
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The prime minister, Wen Jiabao, almost certainly felt relieved on seeing the rate of inflation finally moderate in October; a long-awaited figure since, in January, the Chinese authorities established as their main macroeconomic priority for 2011 to put a stop to the excessive rise in prices. The general CPI rose by 5.5% year-on-year, clearly lower than the 6.1% of September, while the CPI for food, which in China accounts for half the general index, also slowed up, from 13.3% to 11.9%. Even so, the greatest achievement was in production prices, whose rise moderated from 6.5% to 5.0%.
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Now the priority is once again growth and preparing for a gentle slowdown.
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But good news doesn't last long in the present climate. To contain the inflation rate, China increased its interest rate six times in one year and established credit ceilings. These restrictions particularly hit small and medium-sized firms, which account for 80% of the jobs, as credit institutions preferred to lend to large conglomerates with a guarantee from the central government. The restrictive tone of the economic policies in the first half of 2011 has therefore helped to slow down economic activity and will probably result in GDP growing slightly less than 9.0% in the fourth quarter. The figure for industrial production in October, up 13.2% compared with the 13.8% in September, certainly points in this direction of a gentle slowdown, although other indicators such as motor vehicle production and electricity suggest a bigger slowdown.
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Exports continue to slow up but less than imports.
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The slowdown in the global economy and the evident symptoms of fatigue shown by the real estate sector might also make the landing for China's economy less gentle that it would hope. That's why Wen Jiabao stated that the time had come for preventative fine-tuning; in other words, relaxing monetary policy and boosting growth. The first signs of this change in direction in economic policy have not taken long to appear: in October, credit rose and the repo rate fell to seven days.
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The real estate market is showing signs of exhaustion.
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On the other hand, the foreign sector has become a weak factor, in contrast to the pre-crisis years. October's trade surplus grew to 17 billion dollars but this was due more to the drop in imports, especially commodities, than to exports performing well. Exports grew by 15.9% year-on-year, immersed in a slowdown that is likely to continue until year-end. By geographical area, of note is the drastic slowdown in exports to Europe, up by 9.2% year-on-year and, to a lesser extent, those aimed at North America, up by 13.0%. Exports to Asia, which account for 46.3% of the total, also slowed up but still advanced by 18.4%.
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With regard to housing, October's prices fell in most of the main cities, with sales also in clear decline. Of note is the 5.5% cumulative drop compared with June in the city of Wenzhou, in the province of Zhejiang, one of the most economically active and with a large number of small and medium-sized firms. In any case, the continual migration from rural areas to cities is providing a support for growth that other economies lack. Private consumption also has quite a long way to rise and should offset smaller growth in investment and exports. The relative speed of these processes will set the pace of the economy for 2012 and beyond, hence the renewed importance of fine-tuning mentioned by Prime Minister Wen.
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