China
WICHIT CHAITRONG
THE NATION October 15, 2012 1:00 am
The world's second largest economy has been facing heavy headwinds from the weakening global economy and tightening financing conditions in the country, Wensheng said at a closed-door seminar hosted by Siam Commercial Bank.
CICC projects China will grow 7.6 per cent this year and expects a mild turnaround of 8 per cent next year, compared with 10 per cent per year in the past one or two decades. The sluggishness this year is partly a short-term cyclical fluctuation in the economy, he said.
The US Federal Reserve's third round of quantitative easing (QE3) and the European Central Bank's plan to buy government bonds without limit will stabilise the global economy. That should lead to a rise in exports.
What has happened in the past few years in Europe has been destroying investor confidence. QE3 is expected to do more good than harm to China, in contrast to QE2 in 2010, when the Chinese economy was overheated.
Businesses in China have been unloading inventory, as they have suffered from falling prices of their products. However, the destocking is expected to come to an end by the middle of next year.
Tight financing conditions also contributed to the economy's deceleration.
The real interest rate is high now and commercial banks are cautious about lending.
Banks are hesitant because of the decline in safe assets, include their reserves, government bonds and central bank debt.
The People's Bank of China, the country's central bank, is expected to further ease its monetary policy in order to support the economy.
"This year the central bank cut interest rates twice in June and July. Many people wonder why the central bank stopped cutting rates," he said.
The reason was the risk of a property bubble, as housing prices in Beijing and Shanghai have increased four to five times from 10 years ago.
"Property bubbles hamper monetary easing," he said.
ROOM TO CUT RATES
If the property market does not boom and real estate transactions are not high, the central bank is likely to further cut its policy rate.
"There is a lot of room to cut interest rates because rates re-|main high compared with a near zero-per-cent rate in the US," he said.
Another reason why the central bank has not yet moved aggressively on interest rates is that China does not have high unemployment like in the US and Europe.
China instead faces a labour shortage, particularly in lower skills, causing a profit squeeze for companies.
While some critics say China may slide into stagflation, the chances are low.
However, the softening eco-nomy has weighed somewhat on |the labour market, as some |factories have reduced working |hours.
CICC believes that there is big room for fiscal expansion next year.
"The political cycle will support infrastructure investment in 2013," he said.
The staging of the National Congress in the past has been usually followed by large infrastructure investment. The 18th National Congress took place this year.
China currently is experienc-|ing capital outflows. That has prompted the central bank to step in by selling US dollars and buying yuan to prevent currency depreciation.
Chinese investing more overseas has contributed to capital outflows. Chinese corporate balance sheets are not as strong as many people expect. Overall private firms carry liabilities. Only the government's fundamentals are strong as the country earns huge international income.
The Chinese equity market is among the poorest performers due to overvalued shares. Investment returns to shareholders are smaller, as firms have only benefited from expansion, not innovation or efficiency.
"Many people are frustrated |at the high economic growth rate |in China but low returns from |the Chinese equity market," he |said.
The economic growth model there is different from America where firms deliver high returns to shareholders due to innovation and efficiency.
Over the medium and long terms - five to 10 years - China's economy will be become more balanced as domestic consumption will contribute more to economic growth. Currently China depends mainly on exports for growth.
The turning point would start in 2015 when the economy would be more balanced by domestic consumption due to demographic changes, he added.
Vorada Thangsurbkul, head of investment banking at Siam Commercial Bank, said the future| in China is promising for Thai exporters especially food producers.
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Source: http://www.nationmultimedia.com/business/Exports-mild-China-rebound-to-aid-local-firms-30192333.html
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