world growth

world growth

Thursday, July 19, 2012

Fitch Sees ‘Soft-Landing’ for China

Though a hard landing is still a possibility.

A leading credit-rating agency says the Chinese economy will likely see a “soft-landing” as its growth continues to slow, but warns Beijing against relying too heavily on investment to stimulate growth.

Fitch Ratings said in a report Tuesday it does not foresee China's economy slowing sharply in the upcoming period, despite official figures last week showing economic growth slumping to a three-year low.

But Andrew Colquhoun, Fitch's head of Asia-Pacific sovereigns, tells VOA there are worries that China's renewed reliance on investment is unsustainable. He says investment spending in China now makes up nearly 50 percent of its GDP — a rate that is much larger than other large developing countries.

“We think that growth that involves or is driven by an ever-rising share of investment in GDP is inherently unsustainable … Investment is already less efficient in China than it is in these other countries, which could be storing up problems for the future.”

Recent statements by Chinese officials, including Premier Wen Jiabao, have suggested that promoting investment is a main priority in supporting growth in the remainder of the year.

That would represent a change for Chinese leaders, who in recent years have said they are trying to rebalance China's growth model towards greater dependence on consumption, and less on investment and exports.

Colquhoun said he still sees reason for optimism despite China's slowdown, noting that a “quite resilient” labor market has kept incomes growing and has led to a surplus of vacancies in China's cities. He said Fitch maintained its eight percent projection for Chinese growth in 2012.

Even though China's 7.6 percent growth rate in the second quarter of 2012 was its lowest figure since 2009, China's economy – the second largest in the world – is still growing faster than every other leading economy.

Tuesday, July 10, 2012

China and Brazil in $30bn currency swap agreement

China has been trying to push the yuan as an alternative global reserve currency

China and Brazil have agreed a currency swap deal in a bid to safeguard against any global financial crisis and strengthen their trade ties.

It will allow their respective central banks to exchange local currencies worth up to 60bn reais or 190bn yuan ($30bn; £19bn).

The amount can be used to shore up reserves in times of crisis or put towards boosting bilateral trade.

China is Brazil's biggest trading partner. (and Brazil is China's biggest trading partner in Latin America)

"As international credit remains scarce, we will have enough credit for our transactions," Brazil's Finance Minister, Guido Mantega, said.

In March this year, it signed a swap deal with Australia worth up to A$30bn ($31bn; £20bn) to promote bi-lateral trade and investment.

It has also inked currency pacts with Hong Kong and Japan.

Analysts said that Beijing has been trying to push for trade to be settled in yuan, rather than in US dollars, as part of its plans to seek a more global role for its currency.

"The motivation is to be less reliant on the US dollar," Sean Callow, chief currency strategist at Westpac, told the BBC.

"We will see firms in the two countries settle their accounts in local currencies," he added.

Mr Callow added that with an increasing number of economies signing such agreements with China, its plans for a more global role for the yuan had received a major boost.

"It is a big positive for China on that account."
Closer co-operation

While trade between China and Brazil has surged, relations between the two economies have soured in recent times.

In Brazil, there have been concerns that increased imports of low-cost goods from China were hurting the local manufacturing industry.

Beijing, on the other hand, has accused Brazil of raising taxes on Chinese goods in a bid to protect the local industry, a move it says hurts its exports.

Brazil has also levied similar allegations against China.

Despite these tensions, the two countries have agreed to co-operate in various sectors to boost bi-lateral trade.

They said they will work closely in mining, industrial, aviation and infrastructure development.

The agreement also comes at a time when growth in China, the world's second largest economy, has been slowing.

China's economy grew at an annual rate of 8.1% in the first quarter, the slowest pace in almost three years. There are concerns that growth may slow further in the coming months.

However, Brazil's Finance Minister, Mr Mantega said "China will keep being the place where to do business".

Tuesday, July 3, 2012

China economy will grow 7.5% in 2012

 China's cooling economy should stabilize in the third quarter and the government is confident it can meet its growth target of 7.5 percent for the year, the chief researcher at the finance ministry said on Thursday.

Beijing is "cautiously optimistic" about China's economic prospects because it has scope to loosen monetary and fiscal policies to shore up activity, said Jia Kang, director of the Research Institute for Fiscal Science at the Ministry of Finance.

"Looking at the second half of the year, we are still confident we can meet the growth target of 7.5 percent," Jia said at a financial forum in Shanghai. "We should see stabilization (in economic activity) in the third quarter."

Analysts believe economic expansion of under 7.5 percent in China is risky as it flirts too closely with a 7 percent growth threshold seen to be the minimum needed to create enough jobs.

Concern has been growing that slowing exports, factory production and investment would lead China to miss its 2012 growth target, a level many had thought Beijing would comfortably beat when it was announced in March.

After growth sank to near three-year lows of 8.1 percent in the first quarter, China surprised many in the market by cutting interest rates by 25 basis points earlier this month.

It has also lowered banks' reserve requirements twice this year by a total of 100 basis points to 20 percent, a level analysts say is still too high and which they expect to be reduced by another 100 basis points before the year end.

"VERY RISKY"

Indeed, an executive director at the Bank of Communications , China's fifth-largest bank by assets, said it would be "very risky" if China's economic growth slips under 7.5 percent.

That would spark a broad downturn across all major business sectors, raise loan losses for banks, and amplify risks around China's local debt problems, Qian Wenhui said.

China has a 10.7 trillion yuan ($1.7 trillion) debt mountain incurred by local governments after the 2008/09 financial crisis, when they answered Beijing's call to spend their way to growth. Many see the debt overhang as a big threat to banks.

On that, Jia criticized the government's recent decision to tentatively retract support for local Chinese governments to sell municipal bonds directly to investors.

The turnabout is problematic because local Chinese governments were supposed to sell municipal bonds to raise much-needed cash to pay down debts.

The government's reversal in stance was revealed when the top legislative body removed a legal provision that would have backed the change.

"If you scrap the provision just because you see real conflicts, that means you won't be bringing about any change," Jia said. "I do not understand such a course of action."

Without giving details, Jia said some in the government had opposed the change, but he still expects China to continue with its pilot test to allow local governments to sell bonds.

Economists have said any change China tries to bring to its financial system would be an arduous process as different groups would wrangle to protect their own interests.