Research Dept. News
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Monthly Report, num 356 - April 2012
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International review - China
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China: abandoning the eight
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In March, the world's second economy lowered its annual growth target for the first time in eight years. Prime Minister Wen Jiabao announced that, as from now, the Beijing government's target would go from 8.0% to 7.5%. This change entails the explicit proposal to refocus growth in investment and exports towards private consumption, which in China accounts for just one third of GDP and whose growth rates are usually lower than those of investment.
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The main scenario for 2012 is still one of a soft landing.
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Our main scenario continues to be a soft landing for the economy, with growth that should come close to 8.0% for the whole of 2012. However, the risk of insufficient growth seems more likely than that of an increase in inflationary tensions. Although the trend in prices in the medium and long term points upwards, since China's demographic must continue to push up labour costs, inflationary tensions should not be a problem in 2012, especially when the latest figures confirm that the recovery in inflation in January was due to higher food prices because of the celebrations for the Chinese New Year.
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Inflation moderates to 3.2%.
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In this respect, February's CPI was 3.2% year-on-year, while the CPI for food, which accounts for a third of the total in China, went from rising 10.5% in January to 6.2% in February. The greatest inflationary risk in the short term lies in energy prices, which are government regulated in China. In March, the authorities raised fuel prices by 6% given the losses that the narrow margins were causing for Chinese refineries. However, the rise in the core CPI continued to be moderate, up 1.6% year-on-year in January.
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Whereas the battle against inflation that began mid-2011 seems to have borne fruit, lower growth than expected is the greatest risk in the short term. Awaiting the publication of the industrial production figures for the first two months of 2012, which will show the extent of the robustness in industrial activity, electricity production picked up in February after its hiatus for the New Year celebrations. Similarly, house prices continued to fall in most of the country's cities in February, indicating that this sector, which represents 13% of GDP, continues to slow up. However, the soft landing is feasible as there is still a lot of room for stimulus policies, even more so if inflation is confirmed to be under control. The cash reserve ratio, in spite of the previous month's fall, is still at a high 20.5%, enabling further reductions, while government debt, even including that of local corporations, remains at a moderate level.
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Rapid slowdown in the real estate sector and exports.
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For its part, the trade balance started to fall again. Calendar effects meant that, in February, there was a trade deficit of 31.5 billion dollars, the largest in China's recent history. Although this situation might correct itself in March, the cumulative surplus over the last twelve months is 154.5 billion dollars, very far from the situation prior to the financial crisis. In particular, while the trade surplus accounted for 5.7% of GDP on average in the period 2006-2008, the estimate for the twelve months up to February 2012 remains at 2.0%, suggesting that private consumption should not delay too long in taking over from exports and investment, if growth is to be bolstered.
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