Wednesday 16 January 2013

Expect the Chinese economy to rebound in 2013

After a sharp economic slowdown through much of 2012, China’s economy is growing again.  Whilst the world’s second largest economy is not expected to return to double-digit growth, the predictions of economists are welcome news in a financial world assailed by the eurozone debt crisis and lacklustre recovery in the United States.

After seven consecutive quarters of slowing growth, China's GDP is forecast to rise by 8.0% in 2013, according to a group of economists recently surveyed by the Association for Financial Professionals. The figures would outpace the government's 7.5% growth target for 2012 but are well below the 9.3% recorded in 2011 and 10.4% in 2010. [1]

Sustaining growth is essential for China’s communist leaders, whose claim on authority largely comes from the country’s more liberal economic policies, which have helped lift hundreds of millions of people out of poverty over the past thirty years.

The rebound comes as China officially implements a once-in-a-decade leadership change in March 2013 when Xi Jinping, who was named the next Communist Party chief in November 2012, takes over as president and Li Keqiang becomes premier, in charge of day-to-day administration.  Xi, in his first public appearance after being selected to lead the Party, appeared to address the rich-poor divide, and said China’s citizens “want their children to have sound growth, have good jobs and lead a more enjoyable life. To meet their desire for a happy life is our mission.”

China’s startling economic transformation has long been fuelled by considerable state investment in infrastructure such as railways, airports, bridges and buildings, as well as an emphasis on manufacturing and exports.  But the country is now trying to recreate the past economic drivers of Western countries, promoting demand from within its own increasingly affluent consumers in order to grow the economy. In addition, the Communist Party claims it recognises the need to include the more unfortunate members of society who have not shared in the boom of the noughties as the class gap opens up.

Stronger monthly data during the fourth quarter, including industrial output and retail sales, has increased optimism that the worst is behind China, as did new single-month highs for imports and exports in December 2012. The economy however, still faces challenges such as overcapacity and reliance on investment-driven growth among other unresolved structural problems, and economists are being warned against over optimism, as stated by Yao Wei economist at Société Génerale in the China Post. [2]

China’s economy averaged GDP growth of 10% in the decade to 2010. A slower rate of 7.0% to 8.0% is seen by economists as part of China’s natural economic evolution as spending on projects such as transport and utility networks is reined in.

However, according to Mark Williams, Chief Asia Economist at Capital Economics “market optimism over China’s prospects risks being disappointed if in 2013 the recovery remains centred on infrastructure and real-estate investment rather than consumption.” [3]

A host of Chinese economic indicators, including the GDP, are set for release this week and the outlook remains optimistic amongst investors. Analysts widely forecast the data to be positive, underscoring the general speculation that the world's second largest economy is mostly out of the woods.


[1] Recent survey conducted by Association for Financial Professionals
[3] Mark Williams, Chief Asia Economist at Capital Economics

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