by Asia Perspective

China’s Economic Growth Struggles Through Second Quarter

August 21, 2012

Despite China’s slowing growth the market still offers huge potential for foreign investment

China’s real GDP growth rate dipped below 8 per cent in the second quarter of this year and now stands at 7.6 per cent, down from 9.5 per cent in the second quarter of the previous year. Given the current trends, further decline in the year-over-year percentage growth rates are anticipated, reaching as low as 6.5 per cent on average.

The slowdown can be attributed to weak demand from the European Union for Chinese exports, as well as the slow recovery of the American economy post-2008. However, the slowdown of recent quarters is largely cyclical rather than structural, in reflection of the current economic climate. Despite recent economic slowdown China’s economy still presents sufficient potential for investment relative to its peers

China still maintains the highest GDP growth rate relative to the remaining BRIC countries as well as other emerging economies. The downward trend in growth is systematic across all BRIC countries, the growth rates of Brazil, Russia and India being 0.5%, 4%, and 5.5% respectively. One of the main challenges that the remaining BRICs face are pressures from double digit inflation. For instance, India raised interest rates 13 times in the last 19 months in order to curb high inflation rates. Whereas China’s CPI inflation rate over the last two quarters is still below its 12th Five-Year Plan target of 4% – the CPI inflation rate rose by 2% in August of this year, which is significantly lower than last year’s 6.5% in the same month.

Chinese exports have maintained their competitive edge over the world economy and relative to its East Asia rivals. However the debt crisis in the EU and the high rates of unemployment in the US have hurt the consumer confidence and dented demand for Chinese goods. The European Union and the US are China’s most important trading partners with the EU accounting for 20% of China’s exports.

Current figures reflect the decline in exports over the last quarter with export growth rates as low as 2.7%. Despite the slow economic recovery export growth has remained positive, enabling the manufacturing sector to expand, albeit slowly.

China’s Balance of Payments experienced a deficit for the first time since 1988, but has since boosted exports and sustained a natural surplus. However concerns over a slowdown in manufacturing activity mount as growth dipped to a nine month low.

The official Manufacturing Purchasing Managers Index (PMI) has been dropping below 50 throughout the year, hitting as low as 48.2 in June and rising slightly to 49.2 in August. The PMI reflects the poor expansion of the manufacturing sector within the last months and forecasts further slow development in the future.

The Chinese government has plans to boost economic growth and stability by stimulating domestic demand as well as investment within selected industries. China’s central bank has lowered the bank’s reserve ratio three times in the past months in a bid to boost lending. Furthermore interest rates have been cut twice since June to bring down the cost of borrowing and promote investment. In addition, the pilot scheme to replace business tax on transportation and modern services with value-added tax in Shanghai will be rolled out to ten other provinces by the end of the year. This will act to ease the fiscal burden for small business in provinces such as Beijing, Jiangsu, Anhui and Fujian. These strategic moves show government support for a more stable and inclusive economy, although much of the economic growth is still dominated by urbanization and infrastructure investment. In the long term, the Chinese government stance is increasingly leading towards a more consumption orientated growth model characterized by a mature economy rather than an emerging one.

There has been increasing uncertainty surrounding the upcoming leadership change of China’s Communist Party, especially in terms of possible adjustments to economic policy. However, there is little reason to believe such drastic changes will follow as China recently released its next Five-Year Plan, which will provide the general framework for economic and social development.

In our view China still remains a competitive sourcing market, especially in selected key industries where we have seen increased specialization, consolidation and a strong focus on R&D. China’s 12th Five-Year Plan has made it clear that China will strive to enhance stable economic growth and scientific innovation capabilities. Central government expenditure for R&D on science and technology is set to rise to $12,434 billion (relative to PPP) which is an 8% increase on last year’s spending. Funding will be allocated in accordance to seven priority industries identified in the Five-Year Plan; these include biotech, clean energy and conservation, new IT, high-end manufacturing, equipment and materials.

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