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  • Dec 27, 2014
  • Updated: 11:28pm

Doubts temper China's strong economic start in 2014

PUBLISHED : Monday, 17 February, 2014, 4:47am
UPDATED : Monday, 17 February, 2014, 5:03pm

China's economy appeared to burst out of the gates at the start of the Year of the Horse, driven by an unexpected surge in the amount of exports and imports last month, moderate inflation and a record level of credit.

But analysts have doubts that the momentum can continue. They fear that weak external demand, industrial overcapacity and defaults on bank loans could undermine economic growth.

JPMorgan China chief economist Zhu Haibin said the mainland's economic growth was vulnerable in the months ahead.

"The slowdown is mainly driven by the shift of policy priority towards structural reform, the tighter rules on local government expenditure and the continuation of 'credit tapering'," Zhu said. He forecast that real gross domestic product growth in the fourth quarter of last year grew at an 8 per cent annual rate quarter on quarter on a seasonally adjusted basis, down from the 9.2 per cent growth of the third quarter.

That would slow to 7.2 per cent in the first quarter of this year, Zhu said, then drop to 6.8 per cent in the second quarter.

The central government has vowed to ensure stable GDP growth while it further liberalises the interest and exchange rate systems and lowers barriers to private investment.

Most analysts said that they wanted to see February figures before attempting to gauge the health of the overall economy because distortions caused by the timing of the Lunar New Year holiday would be eliminated.

Inflation remained tame, standing at 2.5 per cent year on year in January. That was unchanged from December and the lowest level since June and should pave the way for Beijing to launch financial and energy price reforms this year. Still, the inflation figure could also be seen as reflecting weaker demand for meat and other food products.

Reported growth of exports and imports both beat expectations - up 10.6 per cent and 10 per cent year on year, respectively. But the figures were immediately doubted by economists, citing the weaker trade numbers in Taiwan and South Korea.

The data fuelled speculation that companies may have forged transactions to use foreign capital to bet on yuan appreciation, as they did last year.

But other economists said the evidence of hot money inflows was not that strong and pointed to seasonal volatility as a factor. The mainland trade data contrasted with falls in new export orders and imports sub index of the official Purchasing Managers' Index survey, a sign of the lacklustre industrial demand.

Authorities have pledged reforms to transform the economic growth model into one driven more by consumption, rather than exports and investment. Zhu said the reforms would generate growth but that the "positive impact" might not be apparent for a while.

ANZ Bank chief Greater China economist Liu Ligang described the economic outlook as "cautious", adding that the inflation figures had "heightened the downside risks". He said the government ought to lower its annual GDP growth target to 7 per cent this year to achieve sustainable growth over the medium term. The economy grew by 7.7 per cent last year.

"If the Chinese authorities keep the growth target in 2014 unchanged at 7.5 per cent, the government will have to roll out a stimulus policy before June, which could delay the necessary structural reforms," Liu said.

New credit rose to a record in January. Aggregate financing, the broadest measure of credit, totalled 2.58 trillion yuan (HK$3.3 trillion), the People's Bank of China said in a statement yesterday. New local-currency lending hit 1.32 trillion yuan, the highest since 2010. Trust loans, under scrutiny because of default risks, were about half the level that they were a year earlier.

"Banks are still extending a lot of credit and this will somewhat cool down fears that China is slowing dramatically," said Liu. "In the government's mind, growth is still quite important."

As leaders prepare for next month's annual meeting of the legislature, the National People's Congress, officials are grappling with swelling local government debt, volatility in money markets and risks from shadow banking, highlighted by a bailout that averted the nation's first trust default.


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New trust loans issued in January 2014 were 106.8 billion yuan, the PBOC said, down from 210.8 billion yuan a year ago, perhaps reflecting people's present expectation of higher risks of trust defaults.
We also see a relatively great rise in January entrusted loans in the shadow banking sector.
As China's credit growth rebounds (and Europe reported stronger-than-expected economic growth), Asia's stocks rise today.
Some people think that January's credit rise exceeded forecasts and might help to ease worries about cooling retail sales, manufacturing and other activities.
Coupled with a mild January inflation rate, it is suggested that the central bank can ease a bit her monetary policy so as to attain a higher (more-than-7%) GDP growth rate this year.
But China's rebalancing need requires a lower GDP growth rate, possibly lower than 7%.
The recent rise in credit demand is at odds with the relative decline in China's latest overall economic growth and lower investment demand (due to excess capacities).
Part of the newly created loans may not be used to support new real economic activities --- these new loans are just used to repay the old mature ones.
The level of unsatisfactory loans may still be maintained and the overall credit risk may even be larger than before.
(Chinese readers: ****opinion.caixin.com/2014-02-17/100639327.html)


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