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China: When exports decline

China: When exports decline

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Published by: Deloitte University Press on Oct 22, 2012
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02/04/2013

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Asia PacifcEconomicOutlook
October 2012
Weathering Headwinds
China: When exports declineIndonesia: Maintaining expansionJapan: Contraction in the cardsPhilippines: Growth from within
 
 Asia Pacifc Economic Outlook—October 2012 2
China’s economy is slowing down, but a sotlanding is still a possibility, thanks to variousmeasures undertaken by the government thatare helping to oset 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 manuacturing 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 perormance. The sub-index or export ordersreached its lowest level in 42 months, and the sub-indexor 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 perormance since 2009. This was partly dueto declining commodity prices, but it also reectedweakening 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 outow 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 outow andprevent a drop in the value o the currency, the centralbank sold oreign currency. The central bank is boostingdomestic credit in order to oset the negative impacton the money supply o sales o oreign currency. Whena country experiences a net outow 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 risingination 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.
China
 
 Asia Pacifc Economic Outlook—October 2012 3
One eect o the weakening industrial sector is adecline in Chinese company proftability. The profts oChina’s industrial companies ell in August or the fthconsecutive month. Profts were down 6.2 percentrom a year ago, the astest rate o decline this year.Corporate revenue continues to increase, but export-oriented companies are struggling to maintain salesby cutting prices, resulting in weaker proftability.To deal with the slowdown in economic activity,the government has taken a variety o actions. Thecentral bank cut the benchmark interest rate andreduced banks’ required reserves, thereby boostingbank lending. In addition, the government hasincreased public investment in inrastructure.The result o these measures has been positive. China’sgovernment announced that new local currencylending increased by $111 billion in August, the biggestAugust increase on record. This is very likely due tothe recent cuts in interest rates and the reduction inbanks’ required reserves. Indeed, the broad moneysupply increased 13.5 percent in August rom a yearago. Increased lending is welcome, given that severalindicators have lately been disappointing. The questionnow is whether the government will choose to takeurther actions aimed at stimulating the economy.With a change o leadership about to take place inBeijing, major decisions may be put on hold until thenew leaders have time to assess the situation.
To deal with the slowdown in economicactivity, the government has taken a varietyof actions.

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