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FCO releases January China Economic Focus

BritCham / CBBC
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The following is an overview of the FCO's economic summary for January as distributed publicly by email.
  • The Chinese economy expanded by 7.7 percent in 2013, according to the official data. This was the same rate of growth as 2012 and a little higher than the authorities’ target for the year. 
  • Some commentators have noted that 7.7 percent is the slowest growth for 14 years. This is true but it’s important to consider the base-effect: the incremental increase in GDP last year was more than double the incremental increase in GDP in 2003, when headline growth was over 10 percent.
  • China’s macro imbalances have got worse in the past year. Investment contributed around 54 percent of total growth in 2013, up from 47 percent in 2012. Government and private consumption contributed around 50 percent of total growth in 2013, down from 55 percent in 2012. Net exports detracted from growth in 2013, as they have done every year since 2009
  • However, other indicators suggest rebalancing is going well. Wages continue to outstrip headline GDP growth and rural wage growth continues to outstrip urban wage growth. The service sector has become the dominate part of the economy for the first time, comprising 46.1 percent of the economy, up from 34 percent in 1993. Inland provinces continue to outpace the eastern provinces, increasing their share of overall GDP to 44.4 percent in 2013, up from 44.2 percent in 2012
  • A hot topic for 2014 will be the rate of credit growth. Credit has been expanding too fast in the last few years, resulting in a rapid build-up of debt. The authorities have clearly signalled that they want to slow credit growth, and year-on-year growth has already started to decline. This is likely to continue. The question concerns how rapidly this happens, and how that affects GDP growth.
  • Our best guess is that the authorities will want to manage a gradual decline in GDP growth, with a target of ‘around 7.5 percent’ this year. Anything lower would mean downward revisions in consecutive years, which the authorities may fear would destabilise expectations and confidence.
  • A growth target of ‘around 7.5 percent’ in 2014 probably implies credit growth slowing more slowly than some would like. But this shouldn’t be cause of concern: the overall direction of policy is now very clear and the economy is sufficiently resilient to withstand a few more years of sub-optimal credit allocation.
  • The most important areas to watch remain the labour market and inflation. Both are currently fine: wages rising fast, vacancies continuing to outstrip positions and basically stable prices. But if any of these indicators start to deteriorate we should expect the authorities to react quickly. Their most likely response remains to put a brake on reform and initiate a new burst of targeted credit stimulus. 
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