Asia Pacifc Economic Outlook—October 2012 2
China’s economy is slowing down, but a sotlanding is still a possibility, thanks to variousmeasures undertaken by the government thatare helping to oset economic headwinds romEurope.
Just the same, the country is experiencing anabundance o bad news. In September, or example,HSBC and Markit published a purchasing manager’sindex that suggests that Chinese manuacturing wasin negative territory or the 11th consecutive month.The PMI was 47.9 in September compared to 47.6in August; a reading below 50.0 indicates a declinein activity. The weakness was largely related to poorexport perormance. The sub-index or export ordersreached its lowest level in 42 months, and the sub-indexor employment was also in negative territory.Exports are the primary culprit. China’s governmentreported that total exports were up a very modest 2.7percent in August rom a year earlier. Exports to theEU were down 12.7 percent rom a year earlier, andChinese imports ell 2.6 percent in August to theirweakest perormance since 2009. This was partly dueto declining commodity prices, but it also reectedweakening demand in China. Industrial production wasup a relatively modest 8.9 percent in August. Automobilesales were up 8.3 percent in August, ar slower thanthe pace o the last ew years. All o this news suggeststhat China’s economy is weaker than expected, andthe anticipated rebound is not yet here. It also boostsexpectations that the Chinese authorities will engagein urther measures to stimulate the economy.Meanwhile, weakness in the industrial sector is havinga negative impact on investment into China. In August,China experienced a net outow o capital or the thirdtime in 2012. This means that investors are movingmoney out o China, perhaps as a result o the decliningproftability o Chinese companies and pessimism aboutthe Chinese economy. To acilitate the outow andprevent a drop in the value o the currency, the centralbank sold oreign currency. The central bank is boostingdomestic credit in order to oset the negative impacton the money supply o sales o oreign currency. Whena country experiences a net outow o capital, it eitherleads to a decline in the value o the currency or a declinein the money supply i the central bank intervenes tohold the currency steady. Evidently, China’s authoritiesare averse to allowing currency depreciation as it wouldlikely draw criticism rom oreign governments. Given thispolitical climate, China’s central bank has been interveningto keep the currency steady by trying to mitigate risingination and declining currency that could kindle politicalunrest. Yet at the same time, it is assuring that moneysupply growth continues at a moderate and rising pace.