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After going through 30 years with the 10% annual growth rate, China finally went back to the earth. According to the research team of emerging markets at Barclays, the Chinese government has already issued a new economic stimulus package and the central bank consorted by launching easy monetary policies, but China is marching into a new era of output gap (also called GDP gap, referring to the gap between real GDP and potential GDP). Therefore, Beijing is more cautious when taking actions, which means that the economic stimulus is not as radical as the previous one, and that the potential economic growth falls back to 7%-8%.
Throughout the past two months, the of- ficials of different states’central banks were always under heavy scrutiny of the media. The European Central Bank launched the indefinite credit right purchasing plan. Mario Draghi, president of the European Central Bank, said that the organization tried its best to maintain the existence of the European Currency League. He was accompanied by the president of the US Federal Reserves Ben Bernanke, who announced the US indefinite credit right purchasing plan -better known as the round 3 of quantitative easing (QE3). The issuance of these policies greatly inspired the market, where players expect Beijing to enhance the confidence of venture assets markets through its economic stimulus package.
China is certainly about to launch a series of all-round economic stimulus measures to stop the economic growth from being further slowed. As the data from Barclays and Nomura shows, the Chinese central bank, central government and local governments, have already worked out the expenditure plans of 11 trillion yuan (approx. US$ 1.74 million) by the end of September 2012. The analysts at Nomura estimated the GDP growth rate of China in the third quarter at 7.7%, which will rebound to 8.8% in the following quarter.
But Barclays pointed out that the structural and cyclical adjustment of Chinese economy was going to limit the power and scope of the future economic stimulus package. Thus problems could be found for the above-mentioned forecast. “It is a different time,” Barclays wrote in its report. This British organization made it out that China had suffered the large unemployment rate and inflation during the Asian financial crisis in the late 1990s and the financial crisis in 2008 and 2009.
This year, the employment market in China plays well. In the first seven months 8.2 million new positions are added (about 80% of the whole year’s goal is realized) and the salary level went through a “drastic” increase.
The inflation began to rise again. This is also related with the narrowed output gap (It began to be narrowed from the third quarter of 2011, the same time with the start of the “continuous fall of GDP growth”). The inflation indexes represented by the Consumer Price Index hit their bottoms not long ago as they are recovering on both the quarterly and yearly basis. “The stress of inflation is increasing at the same pace with the economic growth.” This means that the potential economic growth rate is undergoing a structural change.
However, in consideration of the fact that the Chinese economic growth is moving to the“new normal” growth rate of 7% and 8%, it is necessary to ensure the smooth transformation with active policies and attitudes. Apart from the aforementioned output gap, “the monthly data has proven time and time again that the ‘downward risk’ is the major threat to the risk of economic growth”, as explained by Barclays. Take the fixed assets investment for example: the investment of this kind has been greatly weakened. And the inventory of industries, especially those cyclic industries, has been deteriorating. Among all statistical indexes, the most problematic thing is the exports growth rate. The data in July and August showed that the increase of export had almost stopped, while the 7% exports growth rate was seen in the second quarter. Since the Chinese economy is highly dependent on the increase of external demand, the stable exports growth is the key to stable economic development.
According to the analysts, the economic stimulus package is assuring and China indeed declared measures about this. In order to stabilize the economic growth, the National Development and Reform Commission (NDRC) has already ap- proved a group of projects of expressways and light rails, in addition to the projects of power station, wind power, airports and the stuff. The total value is estimated at 1 trillion yuan, accounting for 2.1% of the GDP. In addition, local authorities have declared or launched various kinds of investment projects, whose total value exceeds 10 trillion yuan. Meanwhile, China’s central bank lowered the reserve requirement several times to encourage banks to lend more loans and two additional decrease is expected within this year. From last March, China began to take measures to limit the purchasing of residential houses, leading to the obvious slowdown in the property investment, but now the restriction has been eased as well.
Nevertheless, Barclays wrote in its report that those who expect these projects to liven up the economic development again are certainly to be disappointed. This is a sharp contrast with the viewpoint of Nomura. Though the projects born with the economic stimulus package in 2009 can be finished within two years averagely, this time, the NDRC has spent too much time in approving the new projects, which are expected to take 3-5 years. For those local governments’ projects, it might take eight years for them to be completed. Some of them have not been given supporting capital plans.
As mentioned above, the Chinese decision makers are not facing a situation that is as tough as before. The economic growth rate is still maintained at above 7.5% and the employment market remains stable – enviable enough for most countries, even though the inflation stress in this country is going to be enhanced because of the QE3 in the US and the credit rights purchasing plan of the Europe. Barclays also advocates that the political support for the economic stimulus package has been weakened, because the “last round of economic stimulus package was widely blamed after being implemented while the new stimulus package triggers worries about the economic and financial risks in the future”.
It is quite apparent that the Chinese economy is going to be slowed down. Apart from the downward economic data, the Chinese companies have rather bad performance in the stock market. From this year, the SGX FTSE Xinhua China A50 Index dropped 3.2%. Established companies like Baidu and Sohu are not immune to the impact. American lawyer Gordon Chang wrote in his article that the increasing inventory of steel is a companion with the slowed economic growth(the stock price of American steel dropped nearly 25% this year). Alcoa and other big companies that have relations with China have weaker performance than the average level.
The monetary and financial stimulus package should be able to help to stabilize the economy. But the Chinese government is cautious when taking actions. As the economic growth is slower than ever before, the Chinese leaders must control the rhythm of growth, reduce the dependence on foreign demand while increasing the weight of domestic consumption, and attach more importance to inflation than growth, to keep its economy at a stable position.
Throughout the past two months, the of- ficials of different states’central banks were always under heavy scrutiny of the media. The European Central Bank launched the indefinite credit right purchasing plan. Mario Draghi, president of the European Central Bank, said that the organization tried its best to maintain the existence of the European Currency League. He was accompanied by the president of the US Federal Reserves Ben Bernanke, who announced the US indefinite credit right purchasing plan -better known as the round 3 of quantitative easing (QE3). The issuance of these policies greatly inspired the market, where players expect Beijing to enhance the confidence of venture assets markets through its economic stimulus package.
China is certainly about to launch a series of all-round economic stimulus measures to stop the economic growth from being further slowed. As the data from Barclays and Nomura shows, the Chinese central bank, central government and local governments, have already worked out the expenditure plans of 11 trillion yuan (approx. US$ 1.74 million) by the end of September 2012. The analysts at Nomura estimated the GDP growth rate of China in the third quarter at 7.7%, which will rebound to 8.8% in the following quarter.
But Barclays pointed out that the structural and cyclical adjustment of Chinese economy was going to limit the power and scope of the future economic stimulus package. Thus problems could be found for the above-mentioned forecast. “It is a different time,” Barclays wrote in its report. This British organization made it out that China had suffered the large unemployment rate and inflation during the Asian financial crisis in the late 1990s and the financial crisis in 2008 and 2009.
This year, the employment market in China plays well. In the first seven months 8.2 million new positions are added (about 80% of the whole year’s goal is realized) and the salary level went through a “drastic” increase.
The inflation began to rise again. This is also related with the narrowed output gap (It began to be narrowed from the third quarter of 2011, the same time with the start of the “continuous fall of GDP growth”). The inflation indexes represented by the Consumer Price Index hit their bottoms not long ago as they are recovering on both the quarterly and yearly basis. “The stress of inflation is increasing at the same pace with the economic growth.” This means that the potential economic growth rate is undergoing a structural change.
However, in consideration of the fact that the Chinese economic growth is moving to the“new normal” growth rate of 7% and 8%, it is necessary to ensure the smooth transformation with active policies and attitudes. Apart from the aforementioned output gap, “the monthly data has proven time and time again that the ‘downward risk’ is the major threat to the risk of economic growth”, as explained by Barclays. Take the fixed assets investment for example: the investment of this kind has been greatly weakened. And the inventory of industries, especially those cyclic industries, has been deteriorating. Among all statistical indexes, the most problematic thing is the exports growth rate. The data in July and August showed that the increase of export had almost stopped, while the 7% exports growth rate was seen in the second quarter. Since the Chinese economy is highly dependent on the increase of external demand, the stable exports growth is the key to stable economic development.
According to the analysts, the economic stimulus package is assuring and China indeed declared measures about this. In order to stabilize the economic growth, the National Development and Reform Commission (NDRC) has already ap- proved a group of projects of expressways and light rails, in addition to the projects of power station, wind power, airports and the stuff. The total value is estimated at 1 trillion yuan, accounting for 2.1% of the GDP. In addition, local authorities have declared or launched various kinds of investment projects, whose total value exceeds 10 trillion yuan. Meanwhile, China’s central bank lowered the reserve requirement several times to encourage banks to lend more loans and two additional decrease is expected within this year. From last March, China began to take measures to limit the purchasing of residential houses, leading to the obvious slowdown in the property investment, but now the restriction has been eased as well.
Nevertheless, Barclays wrote in its report that those who expect these projects to liven up the economic development again are certainly to be disappointed. This is a sharp contrast with the viewpoint of Nomura. Though the projects born with the economic stimulus package in 2009 can be finished within two years averagely, this time, the NDRC has spent too much time in approving the new projects, which are expected to take 3-5 years. For those local governments’ projects, it might take eight years for them to be completed. Some of them have not been given supporting capital plans.
As mentioned above, the Chinese decision makers are not facing a situation that is as tough as before. The economic growth rate is still maintained at above 7.5% and the employment market remains stable – enviable enough for most countries, even though the inflation stress in this country is going to be enhanced because of the QE3 in the US and the credit rights purchasing plan of the Europe. Barclays also advocates that the political support for the economic stimulus package has been weakened, because the “last round of economic stimulus package was widely blamed after being implemented while the new stimulus package triggers worries about the economic and financial risks in the future”.
It is quite apparent that the Chinese economy is going to be slowed down. Apart from the downward economic data, the Chinese companies have rather bad performance in the stock market. From this year, the SGX FTSE Xinhua China A50 Index dropped 3.2%. Established companies like Baidu and Sohu are not immune to the impact. American lawyer Gordon Chang wrote in his article that the increasing inventory of steel is a companion with the slowed economic growth(the stock price of American steel dropped nearly 25% this year). Alcoa and other big companies that have relations with China have weaker performance than the average level.
The monetary and financial stimulus package should be able to help to stabilize the economy. But the Chinese government is cautious when taking actions. As the economic growth is slower than ever before, the Chinese leaders must control the rhythm of growth, reduce the dependence on foreign demand while increasing the weight of domestic consumption, and attach more importance to inflation than growth, to keep its economy at a stable position.