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Economy Watch
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February 4 Updates
| China Sustains Recovery and Expansion as Exports Escalate
China sustained its manufacturing expansion in January as export orders climbed and inflation pressures grew, according to record readings from the purchasing managers’ index released by HSBC Holdings Plc and Markit Economics. Further results revealed by the Federation of Logistics and Purchasing, also recorded the second- fastest in China’s expansion since 2008.
Concerns over the Chinese government’s efforts to rein in the credit growth that has fueled the nation’s infrastructure spending surge cause China’s stocks to tumble as the reports spurred Policy makers to raise interest rates by the end of June, amid increasing banks’ reserve requirements and targeting reduced credit growth, according to the median estimate in a Bloomberg News survey of economists.
Brian Jackson, a Hong Kong-based emerging markets strategist at Royal Bank of Canada said, “ these numbers should reinforce the case for policy tightening in the months ahead, including a move towards a stronger yuan.”
The Bloomberg News reported that the benchmark Shanghai Composite Index of stocks fell 1.9 percent as of the 11:30 a.m. local time break in trading, extending this year’s slide to 10.5 percent. This indicated that traders expect the Chinese currency to appreciate 2.8 percent in the next year against the dollar. The yuan has been pegged to the U.S. currency for the past 18 months.
Export Grow
It is also reported by the Bloomberg News that the HSBC index increased to a seasonally adjusted 57.4 from 56.1 in December 2009 and the survey proved the biggest gains in input and output prices since July 2008. Export sales tip at a “near- record rate,” a statement on Markit’s Web site said.
The Purchasing Managers’ Index fell to a seasonally adjusted 55.8 from 56.6 in December. Although, growth in output and orders slowed, demand in export continue to quickened and index of input prices climbed (since July 2008) to its highest in January 2010.
JPMorgan Chase & Co. and UBS AG commented that these figures may somewhat reflect disruptions from cold weather and snowstorms. Credit Suisse AG cited “credit tightening” for smaller gains in orders.
The Nomura Holdings Inc. said, the credit boom has added to the risk of swelling inflation and asset bubbles in the economy that will contribute a third of global growth this year.
Increase Lending
The Economic Information Daily reported that banks lent almost 1.6 trillion yuan ($234 billion) last month, it is more than a fifth of the banking regulator’s target for lending for 2010.
It is also reported, China’s growth accelerated to 10.7 percent (the fastest pace since 2007), in the fourth quarter of 2009 after a 4 trillion yuan ($586 billion) stimulus package and record lending.
Result from the logistics federation’s survey was less than the median 56.5 estimate in a Bloomberg News survey of 16 economists. The decline was the first in eight months. The output index dropped for the first time since May last year, falling to 60.5 from 61.4 in December. The export-orders index rose to 53.2 from 52.6.
“China’s economy is at a crucial stage of moving from rebounding to stabilizing” with exports position to make a larger contribution to growth. “In the meantime, companies may face a tougher environment with rising costs and intensified competition.” said Zhang Liqun, a researcher from the State Council Development and Research Center.
Vast Opportunities
China is pursuing a “proactive fiscal policy” and moderately loose monetary policy,” cited, Vice Premier Li Keqiang in his speech on Jan. 28 at the World Economic Forum in Davos, Switzerland.
These policies will contribute to “huge markets for the world and huge opportunities” for foreign companies, he said. Li’s comments reaffirmed a pledge in November by Premier Wen Jiabao to pace the shift from investment and export-led growth to an economy “driven by consumption, investment and exports in a coordinated way.”
“We expect GDP to grow by 9 percent in 2010 and our next revision is more likely to be upward. We expect the government to err on the side of keeping policy accommodative,” said Wang Tao, an economist with UBS AG in Beijing.
The manufacturing indexes, released by the logistics federation and the National Bureau of Statistics base in Beijing, are based on replies of questionnaires sent to purchasing executives by more than 730 companies across 20 industries, beginning in 2005.
The official PMI surveys revealed readings from mainly large and state-owned companies, while HSBC’s sample of more than 400 is weighted more towards smaller businesses and export-related companies, said Xing Ziqiang, an economist at China International Capital Corp and it began in 2004.
Hong Kong Experiences Bubble Risk
Hong Kong may experience bubble risk in its asset markets as low interest rates and high liquidity boost prices, the Hong Kong Monetary Authority (HKMA) said.
Chief Executive Norman Chan said, the “potential risk” is “huge.”
The city also risk facing potential instability from future “capital reversal,” once the government starts increasing borrowing costs and funds flow to a different place, he said.
Chan added that the current low interest rates worldwide are unsustainable in the long run. HKMA reported that Capital inflows into the city summed up to HK$640 billion ($82.4 billion) in the five quarters through December 2009. Equity fund raising was the core reason for the mass inflows.
To help cushion the economy from the global financial crisis, Hong Kong has kept its base rate at a record-low 0.5 percent since December 2008. House prices in the city jumped 29 percent in 2009, fueled by low mortgage rates and buying by mainland Chinese. Chan’s comments confirmed his warning in last December on the threat asset bubbles pose to Asia’s financial stability.
Hong Kong’s economy rebounded last year on domestic demand and inventory re-stocking, while external demand “remained weak,” said the de-facto central bank via its document released. The increase in gross domestic product last quarter was “not bad,” said Chan.
Hong Kong’s benchmark Hang Seng Index soared 52 percent in 2009. It fell to a five-month low in recently after China’s manufacturing expanded, increasing concerns the mainland will act further to prevent the economy from overheating.
China’s Property
China’s property sales surged 75.5 percent to 4.4 trillion yuan ($644 billion) in 2009, resulting in property prices rising the most in 18 months in December. Last month, China re-imposed sales tax on homes sold within five years of their purchase, and the country’s cabinet urged strict application of a 40 percent downpayment requirement for purchase of second homes.
“The mainland authorities have launched different measures to prevent the economy from overheating and asset bubbles forming. This is a good thing as it will help the mainland’s growth to stabilize and a stable environment there is definitely beneficial to Hong Kong,” Chan added.
The “fragile” international financial markets pose a risk for economic growth in 2010, Chan commented.
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