Challenges Mounting For The Government
While China’s economic momentum decelerated for the third consecutive quarter in Q108, there isevidence to suggest that the sharp slowdown from Q 07’s 11. % year-on-year (y-o-y) expansionwas in part a result of the winter snowstorms and the Lunar New Year celebrations, and that economicactivity will remain robust in Q 08. Indeed, despite February’s severe winter weather costingthe Chinese economy more than US$1 bn, according to government estimates, industrial outputgrew 15.4% y-o-y, while fixed asset investment expanded by 24.3% and real estate investmentgrew 32.9%. With March data revealing that industrial output growth rebounded to 17.8% and fixedasset investment to .9% (on a year to date average basis), it seems that following February’sdownturn, domestic activity could now be set to return to Q 07’s heady levels in Q 08.
Pressure on the Chinese government continues to grow as the build-up to the Olympics, inflation,the country’s exchange rate policy and even natural disasters draw increasing criticism. Whilewe see little immediate risk to political stability in China, the growing dissatisfaction nonethelesswarrants careful attention. Meanwhile, on the foreign policy front, President Hu Jintao’s visit toJapan on May 6-10 bodes well for warmer relations between Asia’s two main powers, which areincreasingly bound together by business and trade. However, both sides will continue to vieweach other warily in geopolitical terms, over matters such as their respective military postures,gas deposits in the East China Sea, and Taiwan.
Rampant food price inflation (which came in at 22.1% y-o-y in April) continues to heap pressure onChina’s monetary authorities, and will likely ensure that CPI inflation persists at or around currentlevels over the coming months, despite suggestions from the government that food prices haveshown a slight dip in May. Indeed, with this being the case, we have decided to revise up our 008average inflation forecast from 5.4% to 7.8%. We continue to expect further yuan appreciationgoing forward, as well as restrictions on bank lending and reserve requirement ratio hikes, andsee scope for further direct controls on prices, but caution that these are unlikely to be enough.While a vast supply of cheap labour and rapid economic growth ensures that China remains thetop destination for foreign direct investment (FDI) in the developing world, there still remains anumber of crucial impediments for foreigners wishing to do business within the country. Theseshortcomings are underscored by our business environment ratings, which reveal that bureaucracyand legal framework are the biggest drag on China’s overall score of 52.5, while the country alsoremains uncompetitive with regards to its tax environment. While reforms are ongoing, we stillexpect meaningful progress to remain gradual.
|
0 items
