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Published by: Deloitte University Press on Apr 26, 2013
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Asia PacicEconomicOutlook
April 2013
ChinaJapanSingapore Vietnam
 Asia Pacic Economic Outlook—April 2013 2
Infation abates
Chinese infation has declined. The government reportsthat, in March, consumer prices were up only 2.1 percentrom a year earlier. A decline in ood price infation wasthe principal reason. This is good news or the newgovernment as it opens room or more expansive monetarypolicy. Recently credit market policy had been somewhatrestrictive due to concerns about infation. Monetary policyhas been on hold due to worries about infation, andthere was ear that the central bank might raise interestrates or boost reserve requirements. Now those earsseem to have dissipated. Still, one month does not makea trend. The central bank will monitor infation in thecoming months to decide i a shit in policy is needed.
Credit expands
China’s money supply and local currency lending bothgrew aster than expected in March, contributing tooptimism that a revival o economic ortunes is underway.The trick or Chinese policy makers is to keep credit fowingwhile avoiding infation and asset-price bubbles—especiallyin the property market. It is a tough balancing act.One reason or the expansion in credit is that there hasbeen a food o capital into the country rom overseas.The result is a boost to credit expansion and a bigincrease in the size o China’s oreign currency reserves.These stem rom central bank purchases o incomingcurrency, which is done in order to prevent the renminbirom rising in value. The rise in credit, however, couldbe worrisome in that local governments especially havetaken on a considerable amount o debt. In early April,ratings agency Fitch lowered its rating o Chinese debt,largely due to the precipitous increase in the volume olocal government debt. Fitch noted that China’s ratioo credit to GDP has risen rom 125 percent in 2008 to198 percent today. The concern is that local governmentinvestments are not generating a sucient return toservice these debts. Moreover, local governments haverelied on the sale o land to nance government services.I land prices all, or the demand or land declines, thiscould be problematic or local government nances.China’s central authorities are caught between arock and a hard place. They want credit to expand,
 Asia Pacic Economic Outlook—April 2013 3
but they don’t want to uel infation and they don’twant to oster conditions or credit crises in theuture. They want inbound investment, but theydon’t want more upward pressure on the currency.They will have to make dicult choices.
Slowdown in consumer spending
One major eort o the new government o PresidentXi Jinxing is to ght corruption, which President Xi haspublicly warned could undermine support or the Partyand government. Specically, Xi has cracked down onthe massive amount spent on entertaining ocials,advocating that ocial banquets should consist o “ourdishes and a soup” and should not include extremelypricey Chinese liquors. The government’s ociallypublished retail sales numbers, especially sales at high-priced restaurants, describe a tapering o, consistentwith the goal o the campaign. The decline in luxuryspending across the board is consistent with severaltrends and drivers in the economy evident or severalquarters, including high levels o debt and liquidity issuesin many local governments, that have led to similar eventssuch as auctioning o city-owned luxury vehicles.
Boost to trade
China’s trade data or March was good enough to sparka global rally in equities. China reported that, in March,imports were up a surprisingly large 14.1 percent overthe previous year. This suggests strong domestic demandand bodes well or the strength o exports in countriesthat trade with China—which is just about everyone.In addition, the government reported that exportsincreased 10 percent, more than the market expected.The end result was a modest trade decit or China.
Longer-term concerns
A report rom the Asian Development Bank (ADB) saysthat rising wages in China threaten the competitivenesso the country’s exports. The report noted that infation-adjusted wages have more than tripled in the last decade.I productivity does not keep pace with rising wages, thenthe country loses competitiveness. Already the rise inwages is leading to a shit o low-wage manuacturing outo China and into lower-wage countries such as Vietnam.The ADB report says that Chinese labor productivity hasgrown, but remains roughly 10 percent that o the UnitedStates. It also says that the sharp rise in wages has beenlargely due to changing demographics, leading to adecline in the size o the labor orce. Indeed the numbero 15- to 39-year-olds has declined rom 557 million veyears ago to 525 million today. This decline is expectedto continue. The ADB also says that China’s system oresidence permits, known as the
system, hasexacerbated wage gains by restricting internal migration.The ADB urges that China do more to boost productivityand allow greater fexibility in the labor market.Increases in productivity will require more investmentin human capital, more investment in inormationtechnology, and more ecient use o labor. The latterrequires a more competitive business environment.
Chinas trade data or March was good enoughto spark a global rally in equities. Chinareported that, in March, imports were up asurprisingly large 14.1 percent over theprevious year.

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