Chinese Economy Monitor – Note No. 03

(November 04, Chennai, Sri Lanka Guardian) What will be the impact of the global financial and economic melt-down on the Chinese economy? This question should be of interest to the other countries of the South and the South-East Asian region. If the Chinese economy is badly affected, they too are likely to feel the negative consequences of the down-turn in the Chinese economy. Keeping this in view, we have been bringing out a periodic "Chinese Economy Monitor" based on open information. This is the third in the series---B. Raman

CONFIDENCE IN THE ECONOMY, THE NEED OF THE HOUR, SAYS WEN

Summing up the discussions at the Asia-Europe Meeting Summit held in Beijing, Prime Minister Wen Jiabao told the media on October 24, 2008, as follows: "We will discuss with world leaders on measures to cope with the financial crisis in a pragmatic and cooperative manner.I think what we should do to cope with the crisis can be summarized as confidence, cooperation and responsibility.We are very glad to see that many countries have taken measures that have initially proved effective. But this is not enough given the current situation, and more needs to be done.The stability of financial market is key to stabilizing the whole economy. The first important message that the two-day summit has conveyed is firm confidence, and I think confidence is the source of power to overcome difficulties."

---- Source Xinhua

Liu He, Deputy Director of the Office of the Central Leading Group on Finance and Economy Work, told the "China Daily" on October 24,2008, as follows: "The worsening global economic situation makes it difficult for China to predict its growth for next year.How fast China's economy will grow next year is uncertain. To a large extent, the rate will be decided by the external situation.This year, GDP is estimated to grow at 9.4 or 9.5 per cent, down from 10.6 per cent last year.However, the impact of the current financial turbulence on our economy is much less than in the rest of the world. China can use the downturn as an opportunity to restructure its economy, which has relied heavily on government investment, foreign trade and low-cost technology over the past years. When the economy is experiencing fast growth, companies are unwilling to upgrade their technologies.The slowdown gives such firms the opportunity to enhance their competitive edge through better technologies."

----Source "China Daily"

ELECTRONIC EXPORTS CONTINUE TO GROW, BUT LESS RAPIDLY

China's trade in electronic and information products increased during the first eight months of 2008, but the growth rate of both exports and imports decreased.Electronic and information products constitute the largest single item in terms of value in China's export basket.About two-thirds of the exports come from wholly foreign -owned manufacturing units in China----mainly from Japan, South Korea, Hong Kong and Taiwan--- 16 per cent from joint ventures and the remaining 18 per cent from wholly Chinese-owned companies. These products include mobile phones, fax machines, TV sets, computers, digital cameras and the like.During the first eight months of this year, the total value of the exports of these items was about US $ 338.62 billion , an increase of 22.53 per cent as compared to the corresponding period of 2007. The growth rate during the same period in 2007 as compared to 2006 was 24.53 per cent. Thus, the export growth rate decreased by two per centage points, but it is still high. China imported $ 246.81 billion worth of electronic and information products from January to August, up 15.45 per cent as compared to the corresponding period of 2007. However, the growth rate was five per cent lower than last year. The imports include whole products imported for sale to the Chinese consumers as well as parts imported for assembly and re-export.Trade surplus of electronic and information products increased by 46.7 per cent to US $91.81 billion , accounting for 60.4 percent of China's total trade surplus. China exported $4.12 billion worth of software in the first five months of 2008, up 45 per cent over the corresponding period of 2007.Software exports surged from $720 million in 2001 to $10.24 billion in 2007. (My comments: The total value of India's software exports is around US $ 40 billion per annum.)

-------Source: Xinhua

FOREIGN EXCHANGE RESERVES CONTINUE TO BULGE; YUAN ASSETS PREFERRED TO DOLLAR & EURO

The People's Bank of China, which is China's central bank, reported on October 13,2008, that the country's foreign exchange reserves surged to 1.9056 trillion U.S. dollars through September. The figure was up by 32.92 per cent as compared to the first nine months of 2007. Foreign exchange reserves grew by 47.7 per cent during the first nine months of 2007 as compared to the corresponding period of 2006. Thus, the growth rate has dropped by 14.8 per cent.China overtook Japan to become the world's largest holder of forex reserves in February 2006. Till June,2008, the foreign exchange reserves were growing by 35.73 per cent. This came down to 32.92 per cent by September-end,2008. During the first three quarters of 2008, China's trade surplus decreased by 2.6 per cent year-on-year to 180.9 billion U.S. dollars. There was a flow of 377.3 billion U.S. dollars to the forex reserves in the first three quarters. In September, the reserve build-up expanded by 21.4 billion U.S. dollars, compared with rises of 36 billion U.S. dollars and 39 billion U.S. dollars in July and August, respectively. The monthly increase was averaged at 41.9 billion U.S. dollars in the first nine months, still higher than an average 38.5 billion U.S. dollars recorded last year. The average monthly increase for the third quarter alone was 32 billion U.S. dollars, and higher than market expectations. The country's trade surplus had been expanding by more than 27 billion U.S. dollars each month in the third quarter, which also overran market expectations. Tan Yaling, a China International Economic Relations Society economist, said the growth in forex reserves also indicated a growing interest in yuan assets as a haven for investment amid the global turmoil. "Under the current financial crisis that originated in the United States and with the euro also softening, China's yuan-denominated assets appear relatively safer and created an influx of foreign investment, which also contributed to the growth in the third quarter." Zhang Bin, a Chinese Academy of Social Sciences researcher, said the U.S. financial crisis had a limited impact on the country's huge forex reserves, as the forex supervisor had diversified the holdings so as to avert some risks. Through September, the M2 -- a broad measure of money supply, which covers cash in circulation plus all deposits -- grew by 15.29 per cent from a year ago to 45.29 trillion yuan (6.7 trillion U.S. dollars). The M2 growth was 0.71 percentage points lower than the previous month. The figure had fallen for the fourth consecutive month as the government's tightening measures started to take hold. Tightening policies, including several interest rate hikes, since the end of last year, adopted to fight soaring inflation and overheating risks, however, had recently been replaced by two rate cuts in less than a month. Such moves were taken to boost the domestic economy amid worries over the deepening global financial crisis. Through September, the narrow measure of money supply, M1, was up 9.43 percent to 15.57 trillion yuan, again lower than the 11.48 percent rise in August.The central bank report also claimed that the country's financial system remained stable. Outstanding local currency loans expanded 14.48 percent to 29.65 trillion yuan. The growth was 0.19 percentage points higher than the previous month. Outstanding loans in foreign currencies, however, rose 30.86 percent to 269.2 billion U.S. dollars, compared with a gain of 37.84 percent in August. The report said local-currency deposits were up 18.79 percent to 45.49 trillion yuan, while foreign-currency deposits grew 9.37 percent to 174.2 billion U.S. dollars. Local-currency transactions on the inter-bank market reached 9.49 trillion yuan last month. Average daily transactions were 451.9 billion yuan, up 17 percent year on year.

---- Source Xinhua

ASSESSMENT

My comments: While the toy industry is in a state of serious crisis due to a steep fall in demands from the US, the electronic and information products industries, which contribute nearly 60 per cent of China's trade surplus, continue to do well. There has been a decline in orders as compared to 2007, but not very high. However, if this decline expands in the coming months, that could add to the difficulties faced. The foreign exchange reserves continue to bulge despite a slight drop in trade surplus.The fall in the flow of reserves due to a slight drop in trade surplus has been compensated by a flow of money from foreign investors, who prefer yuan-denominated assets to US dollar anf Euro denominated ones.One does not know how much of China's foreign exchange reserves has been invested in the US Treasury bonds. If these bonds lose in value as a result of the melt-down in the US, that could aggravate the difficulties. The Chinese leaders and officials are projecting a picture of confidence that they will be able to keep their economy stable. Whether their confidence is justified or not would be evident only by January. Presently, the electronic and information products and textiles industries are doing well on the basis of the export orders received before the melt-down started in the West. What inpact the melt-down has on post-September orders would be evident only by January. The present Chinese worry is over the spectre of unemployment as the export orders come down. How healthy is their banking system? An answer to this question is not yet available.

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(The writer is Additional Secretary(retired), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. He is also associated with the Chennai Centre For China Studies. E-mail:seventyone2@gmail.com ) - Sri Lanka Guardian