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Eiu china country_report_april_2012

  1. 1. Country ReportChinaApril 2012Economist Intelligence Unit26 Red Lion SquareLondon WC1R 4HQUnited Kingdom
  2. 2. Economist Intelligence UnitThe Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For 60 years it has been a source of information on business developments,economic and political trends, government regulations and corporate practice worldwide.The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where thelatest analysis is updated daily; through printed subscription products ranging from newsletters to annualreference works; through research reports; and by organising seminars and presentations. The firm is amember of The Economist Group.London New YorkEconomist Intelligence Unit Economist Intelligence Unit26 Red Lion Square The Economist GroupLondon 750 Third AvenueWC1R 4HQ 5th FloorUnited Kingdom New York, NY 10017, USTel: (44.20) 7576 8000 Tel: (1.212) 554 0600Fax: (44.20) 7576 8500 Fax: (1.212) 586 0248E-mail: E-mail: newyork@eiu.comHong Kong GenevaEconomist Intelligence Unit Economist Intelligence Unit60/F, Central Plaza Boulevard des Tranchées 1618 Harbour Road 1206 GenevaWanchai SwitzerlandHong KongTel: (852) 2585 3888 Tel: (41) 22 566 2470Fax: (852) 2802 7638 Fax: (41) 22 346 93 47E-mail: E-mail: geneva@eiu.comThis report can be accessed electronically as soon as it is published by visiting or by contacting alocal sales representative.The whole report may be viewed in PDF format, or can be navigated section-by-section by using the HTML links.In addition, the full archive of previous reports can be accessed in HTML or PDF format, and our search enginecan be used to find content of interest quickly. Our automatic alerting service will send a notification via e-mail when new reports become available.Copyright© 2012 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication norany part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means,electronic, mechanical, by photocopy, recording or otherwise, without the prior permissionof The Economist Intelligence Unit Limited.All information in this report is verified to the best of the authors and the publishers ability. However, theEconomist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.ISSN 1473-897XSymbols for tables“0 or 0.0” means nil or negligible; “n/a” means not available; “–” means not applicablePrinted and distributed by IntypeLibra, Units 3/4, Elm Grove Industrial Estate, Wimbledon, SW19 4HE.
  3. 3. China 1 China Executive summary 3 Highlights Outlook for 2012-16 4 Political outlook 6 Economic policy outlook 7 Economic forecast Monthly review: April 2012 12 The political scene 14 Economic policy 16 Economic performance Data and charts 18 Annual data and forecast 19 Quarterly data 20 Monthly data 22 Annual trends charts 23 Quarterly trends charts 24 Monthly trends charts 25 Comparative economic indicators Country snapshot 26 Basic data 27 Political structure Editors: Duncan Innes-Ker (editor); Anjalika Bardalai (consulting editor) Editorial closing date: March 20th 2012 All queries: Tel: (44.20) 7576 8000 E-mail: Next report: To request the latest schedule, e-mail schedule@eiu.comCountry Report April 2012 © The Economist Intelligence Unit Limited 2012
  4. 4. 2 RUSSIAN FEDERATION KAZAKHSTAN Manzhoul Manzhouli Hailar YichunCountry Report April 2012 Jiamusi Qiqihar HEILONGJIANG Jixi Harbin MONGOLIA INNER Yining MONGOLIA Changchun Jilin Urumqi Yanji KYRGYZ REP. Xilinhot Tongliao XINJIANG JILIN Asku Korla Fushun TAJIK Chifeng Shenyang IS Kashgar LIAONING NORTH Hohhot Zhangjiakou Anshan Ans An KOREA TA N Dandong Sea of Japan Baotou (East Sea) H AN. Datong BEIJING Tangshan Tan FG Tianjin Dalian A HEBEI N Yinchuan SHANXI Yantai SOUTH TA Taiyuan Shijiazhuang NINGXIA Yellow KOREA JAPAN KIS Golmud Jinan Zibo Xining Yanan SHANDONG Qingdao Sea PA Lanzhou Y e llo w R. QINGHAI Lianyungang GANSU Luoyang Zhengzhou Tianshui Xian JIANGSU SHAANXI HENAN INDIA XIZANG Huainan (TIBET) CHINA Nanjing Wuxi Xiangfan Xinyang Shanghai SICHUAN Mianyang HUBEI ANHUI Wuhu Yang tze R. East China Chengdu Wanxian Wuhan Hangzhou Ningbo Main railway Lhasa Sea CHONGQING Jiangling NE PA Leshan Chongqing ZHEJIANG Main road L La n c an Changde Nanchang Wenzhou International boundary HUNAN Changsha BHUTAN g R. ( M Province boundary JIANGXI Nanping Nanpi INDIA GUIZHOU Hengyang ekong R. Dukou Guiyang FUJIAN Fuzhou Main airport Liupanshui ) Ganzhou Capital BANGLADESH Dali Kunming Shaoguan Xiamen Major town Liuzhou GUANGDONG TAIWAN YUNNAN GUANGXI Guangzhou Other town Nanning Yulin Hong Kong MYANMAR Macau PACIFIC 0 km 250 500 750 1,000 VIETNAM OCEAN (BURMA) Zhanjiang 0 miles 250 500 Bay of Bengal LAOS Gulf of Haikou South China Tonking HAINAN Sea © The Economist Intelligence Unit Limited 2012© The Economist Intelligence Unit Limited 2012 China
  5. 5. China 3 Executive summary Highlights April 2012 Outlook for 2012-16 • The handover of power to a younger generation of leaders in 2012-13 will slow reform during that period, but the new administration is likely to try to make its mark on economic and political policy in 2014-16. • A variety of grievances mean that protests will continue to be common in rural China. But they are likely to remain localised, rather than developing into wider movements that potentially threaten national political stability. • Economic expansion will moderate to an average of 8.1% a year in 2012-16 as net exports subtract from GDP growth. Private consumption will contribute 42% of real GDP growth in the period, up from 29.5% in 2007-11. • Strong GDP data for the fourth quarter of 2011 support the Economist Intelligence Units view that Chinas economy will avoid a hard landing in 2012. We forecast that the economy will expand by 8.3% this year. • The liberalisation of Chinas capital account will proceed steadily. A growing number of quotas will be granted to foreign institutions to facilitate invest- ment in local securities and bond markets. Monthly review • The government has revised the countrys criminal code. Although including some welcome changes, the amendments also sanction long periods of arbitrary detention by the security forces. • The Chinese Communist Party secretary in Chongqing, Bo Xilai, was removed from his position in March. He is the most senior politician to be purged since Shanghais party secretary, Chen Liangyu, in 2006. • Ethnic unrest has continued in the province of Xinjiang and in areas dominated by the Tibetan minority. Around 20 people died in a clash in the provincial town of Yecheng in February. • The premier, Wen Jiabao, targeted 7.5% GDP growth for 2012, lower than the goal of 8% in 2011, in his address to the National Peoples Congress (the annual session of the legislature) in March. The inflation target was 4%. • A report produced by an influential Chinese think-tank, the Development Research Centre, and the World Bank called for reforms to the state-owned sector. It also called for more labour mobility. • Sheng Songcheng, the head of the central banks Survey and Statistics office, also called for economic reform in a report advocating a ten-year schedule of incremental reforms to open the capital account. • Official estimates show that China has an estimated 25.1trn cu metres of shale-gas reserves. Annual output could reach 6bn cu metres by 2015.Country Report April 2012 © The Economist Intelligence Unit Limited 2012
  6. 6. 4 China Outlook for 2012-16 Political outlook Political stability The Chinese Communist Party (CCP) will continue to dominate the political scene in the forecast period. Despite discontent among the public over corrup- tion and the privileges of the CCP elite, there is little appetite for regime change. Most Chinese citizens have seen their standards of living rise sharply in recent times and expect further improvements in the next five years. The CCP retains the strong support of the military and benefits from a sophisticated internal security network. Although regime change looks unlikely, factional rivalries within the party are intensifying in the run-up to the CCP congress in late 2012, which will see a new generation of politicians promoted to the party leadership. These rivalries were evident in the fall of Bo Xilai, Chongqings maverick party secretary, after the March session of the National Peoples Congress (NPC, Chinas legislature). Despite the current conservative line towards dissent, there is a chance that political reform will edge forwards once a new set of leaders is in place after 2012. The longer such reform is delayed, the greater the likelihood that a bout of economic turbulence could destabilise the country politically. Meanwhile, political tensions will continue to be generated by a number of social problems, including graduate unemployment, poor working conditions, environmental pollution, late payment of wages and benefits, illegal eviction from homes and land, official corruption, cost-of-living issues and abuse of power by state officials. The resolution of a high-profile dispute in the town of Wukan, in Guangdong province, demonstrated how some authorities have developed a more nuanced approach to social unrest, including elements of persuasion and co-option in addition to repression. A protest leader in Wukan was promoted to the position of village party secretary, marking a departure from the usual government strategy of punishing those seen as directing dissent. Improved access to modern technology means that the rural population is better organised, but disputes in the countryside will remain localised. There is little potential for such protests to develop into wider movements that might threaten national political stability in 2012-16. Unrest in urban areas could pose a greater threat. The CCP suppresses non-governmental organisations that might co-ordinate or channel social discontent, and it is tightening control over the media. Yet in an economic or political crisis it is possible that anti- government forces could suddenly coalesce in a way that would be hard to control without bloodshed. The nascent force of labour activism, especially in high-skill industries such as vehicle production, looks set to prove troublesome. Separatist movements will remain weak, but ethnic unrest will occasionally erupt in the ethnic-minority regions of Tibet and Xinjiang, and related incidents of terrorist violence elsewhere in China are possible. Large-scale violence, leading to numerous deaths, broke out in Tibet in 2008 and Xinjiang in 2009. Both regions are likely to see further small-scale incidents—there have, forCountry Report April 2012 © The Economist Intelligence Unit Limited 2012
  7. 7. China 5 example, been numerous self-immolations among the Tibetan community in recent months. There is a small risk that separatism in Xinjiang will escalate into a full-blown insurgency owing to the proximity of the province to sepa- ratist and Islamist groups in Central Asia. The Tibetan separatist movement could also grow more violent when the exiled Tibetan spiritual leader, the Dalai Lama, dies. The Chinese government continues to take a harsh approach to curbing separatist and ethnic unrest. It is also increasing development spending in Xinjiang and Tibet in an attempt to pacify these regions by improving economic opportunities, although this tactic has failed in the past. Election watch Since Chinas current leadership, headed by the president, Hu Jintao, and the premier, Wen Jiabao, came to power a collective-style government has emerged. New members were "elected" to the leaderships of both the CCP and the government in 2007-08. The next reconfiguration will begin in late 2012, when Mr Hu and Mr Wen will prepare to retire and the CCPs 18th congress will select a new party leadership. This will be followed by the installation of a new state leadership in early 2013. The vice-president, Xi Jinping, is heir-apparent to Mr Hu, while the current executive vice-premier, Li Keqiang, who is regarded as being Mr Hu’s favourite among the rising generation of cadres, looks set to succeed Mr Wen. Rumours that Mr Xis and Mr Lis promotions are still open to question are likely to prove unfounded, as much effort has gone into grooming them for the highest positions. However, the composition of the rest of the top tier of the future leadership is less certain—as Mr Bos unexpected fall has proved. The group of potential candidates appears less ideologically cohesive than the current government, and factional struggles are likely in 2012-16 as the new leaders seek to establish their independence and as they compete among themselves for control of the political agenda. Neither Mr Hu nor his successor is likely to countenance a meaningful opening up of the electoral process, but discussions about the possibility of increasing intra-party democracy may resume after 2012. International relations Since 2008-09 China has adopted a more forceful position on the international stage over a range of issues, such as global warming and territorial claims over the South China Sea. Its greater assertiveness means that further confrontation is likely in 2012-16. The countrys military and diplomatic confrontations with its neighbours will encourage them to look to the US for political support. China will be a crucial participant in global negotiations on a range of economic and diplomatic issues, but it is highly sensitive to perceived slights, interference in its internal affairs and what it characterises as attempts to curb its rise. Its ability to deal effectively with other major powers is hampered by the weak influence within China of the Ministry of Foreign Affairs. China’s claim on Taiwan will remain a foreign policy priority, but military escalation of the dispute looks unlikely, as economic ties with Taiwan have deepened and China has adopted a less aggressive posture towards the island. The status quo looks set to endure following the re-election in January 2012 of Taiwans president, Ma Ying-jeou, who has overseen the recent improvement in the islands relations with China. North Korea is a potential flashpoint, particularly in the context of the uncertainty generated by the death of itsCountry Report April 2012 © The Economist Intelligence Unit Limited 2012
  8. 8. 6 China leader, Kim Jong-il. Chinas support for North Korea has been criticised in the past, but the international community will look to China to use whatever influence it has to nudge the new North Korean regime towards reform. China’s expanding international interests have been highlighted by increased activity in fields such as peacekeeping and anti-piracy patrols. This trend is likely to continue, but military intervention by China to defend its interests in territory that it does not claim as its own still looks unlikely in 2012-16. The greatest source of Chinese influence on the global stage will be the desire of foreign governments and companies to tap Chinas vast market and also to attract Chinese investment. Economic policy outlook Policy trends As inflation concerns ease, the authorities will have greater room in 2012 to ease policy in order to support the economy, but monetary policy is unlikely to be loosened greatly, as the government is still concerned about the after-effects of the last stimulus effort in 2009-10. Addressing the risks posed by the related surge in local government debt and off-balance-sheet lending will be a priority. Interest rates are unlikely to be cut in 2012 unless there is a deterioration in the external environment beyond that currently forecast by the Economist Intelligence Unit. Similarly, although there will be calls from local governments for measures restraining the property market to be rolled back, given that the real estate sector is vital to local authorities revenue this will not happen until the central government is content that prices have fallen sufficiently. Although exports are no longer as important to China as they once were, rebalancing the economy away from its dependence on investment will be a key goal. Economic growth will nevertheless continue to rely on unsustainably high rates of investment even as consumption is boosted. The government will look to moderate increasing social inequality. China raised its official rural poverty threshold in late 2011, thereby more than quadrupling the number of residents eligible for income support. Redistributive tax reforms further to those announced in 2011 could be enacted in 2012-16. Officials will support workers efforts to secure substantial pay increases, but state welfare services will remain underdeveloped, despite growth in spending on health, education, pensions and poverty alleviation. Fiscal policy China recorded an estimated budget deficit equivalent to 1.1% of GDP in 2011, although this does not include a large amount of off-budget expenditure. The deficit will average around 1.6% of GDP in 2012-16, with wider deficits early in the forecast period, partly owing to the use of higher public spending to support slowing economic growth. Expenditure on education, healthcare and other forms of social welfare will continue to see faster growth than other areas of public spending. At central government level, revenue growth will remain strong as the domestic economy continues to expand rapidly. The governments financial position is not as healthy as the headline figures suggest. The extent of off-budget expenditure, including military spending, is hard to quantify—and some of it is being brought back on-budget, inflating revenue and expenditure expansion. The quality of figures relating to localCountry Report April 2012 © The Economist Intelligence Unit Limited 2012
  9. 9. China 7 government finances is poor. Local authorities fiscal positions deteriorated as borrowing to fund stimulus programmes increased in 2008-10. The debt burden of the investment platforms that local governments created to channel this expenditure will probably grow in 2012-16 as interest rates rise, and many loans seem to be being rolled over rather than repaid. Local authorities finances will also suffer as their revenue from land sales falls in the forecast period, particularly in 2012. An even greater problem is the central governments large contingent liabilities, which include the cost of pension provision and potential future losses by state-owned banks. Monetary policy The People’s Bank of China (PBC, the central bank) raised interest rates several times between October 2010 and July 2011, but has shifted towards a policy more supportive of growth since late 2011. As a result, it is not likely to raise rates until late 2012, when inflation concerns will re-emerge as a priority. In the meantime, the PBC will move to boost domestic liquidity levels, notably through reducing bank reserve requirements (which were lowered again in February 2012), open-market operations and guidance to the state-owned banking sector on credit issuance. It will also step up efforts to deepen the domestic bond market in order to reduce companies dependence on banks when raising capital, although this policy may face political opposition from other parts of government. In the latter part of the forecast period the PBC will push for interest rates to be assigned a greater role in place of quantitative tools. But a sharp rise in rates could challenge Chinas investment-driven economic growth model, and the shift is therefore likely to be gradual. Economic forecast International assumptions 2011 2012 2013 2014 2015 2016 Economic growth (%) US GDP 1.7 1.8 2.0 2.2 2.3 2.3 OECD GDP 1.8 1.1 1.8 2.1 2.2 2.2 World GDP 2.6 2.1 2.7 2.9 3.1 3.0 World trade 5.8 4.0 5.6 6.2 6.5 6.5 Inflation indicators (% unless otherwise indicated) US CPI 3.1 2.1 2.2 2.1 2.2 2.2 OECD CPI 2.8 2.1 2.2 2.2 2.2 2.3 Manufactures (measured in US$) 6.8 -0.7 0.4 1.5 1.8 1.9 Oil (Brent; US$/b) 111.0 110.0 103.6 108.3 104.0 110.0 Non-oil commodities (measured in US$) 26.3 -12.2 -1.9 -3.6 3.4 2.8 Financial variables US$ 3-month commercial paper rate (av; %) 0.2 0.2 0.2 0.3 1.2 2.6 ¥ 3-month money market rate (av; %) 0.2 0.1 0.2 0.9 1.3 1.5 ¥:US$ (av) 79.8 77.3 80.5 81.0 82.0 83.0 Rmb:US$ (av) 6.46 6.28 6.18 6.09 5.98 5.87 Economic growth Tight credit policies succeeded in cooling real economic growth to 9.2% in 2011. Strong GDP data for the fourth quarter of 2011 support our view that Chinas economy will avoid a hard landing in 2012, when we expect the economy to expand by 8.3%. Although demand for Chinese exports in the EU (which isCountry Report April 2012 © The Economist Intelligence Unit Limited 2012
  10. 10. 8 China expected to enter recession in 2012) and the US will weaken, strong local income growth will support private consumption. The government will also loosen credit policies and enact fiscal stimulus measures to support economic growth in 2012, but the scale of the boost provided will be small. In 2013-16 GDP growth will slow to an average of 8.1% a year. The rate of economic expansion in 2013 will be slightly higher as the policy relaxation of 2012 pushes up investment, but in general investment growth will moderate as higher input costs and rising interest rates make property and infrastructure development more costly. A rapid rate of job creation and rising wages should ensure strong growth in private consumption, while the ongoing development of social services will support increases in state expenditure. As domestic demand expands rapidly, import growth will outpace export expansion, with the consequence that net exports will subtract from GDP growth throughout 2012-16. Export expansion will nevertheless remain impressive, largely owing to emerging-market demand, despite the negative impact on overseas sales of a strengthening renminbi and rising costs in China. Despite the generally optimistic outlook, there is a risk that China could suffer a sharp slowdown in growth in the next five years. The frothy local housing market and excessively high levels of investment are the most likely sources of economic turbulence. The government’s capacity to counteract economic crises is strong, but its ability to do so without aggravating the imbalances that already threaten the economy is uncertain. Economic growth % 2011 a 2012 b 2013 b 2014 b 2015 b 2016 b GDP 9.2 c 8.3 8.5 8.0 8.0 7.9 Private consumption 9.0 9.2 10.2 10.0 9.5 9.4 Government consumption 9.8 12.5 8.9 9.1 9.4 9.0 Gross fixed investment 10.1 8.5 9.4 8.8 8.6 8.2 Exports of goods & services 10.1 7.6 9.7 8.9 8.7 8.2 Imports of goods & services 10.9 9.7 12.2 11.3 11.0 10.2 Domestic demand 9.5 9.2 9.5 9.0 9.0 8.8 Agriculture 4.5 c 3.0 2.8 2.9 3.1 2.6 Industry 10.6 c 8.5 8.8 8.4 8.0 7.8 Services 8.9 c 9.1 9.2 8.5 8.9 9.1 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual. Inflation Consumer price inflation averaged 5.5% in 2011, despite the governments efforts to curb money supply growth in order to bring inflation closer to its 4% target. Inflation will decelerate to 3.7% on average 2012, as the delayed impact of the past monetary tightening feeds through and global commodity costs moderate. However, in the remainder of the forecast period strong liquidity growth, booming demand and increasing input costs will apply upward infla- tionary pressure. A sustained rise in salaries will also push up manufacturing costs, and this may prompt manufacturers to increase prices. Soaring wages will have a particularly strong impact on prices for labour-intensive agricultural products. We expect consumer price inflation to average 4.3% a year in 2013-16.Country Report April 2012 © The Economist Intelligence Unit Limited 2012
  11. 11. China 9 The risks to our inflation forecast remain largely on the upside. Food prices account for a large share of the consumer price index basket in China and are on a long-term upward trend owing to rising input costs, but they could increase by more than currently forecast. Local agricultural prices are vulnerable to changes in global oil costs (as agriculture is fuel-intensive) and the vagaries of the weather. Fears of a deterioration in the Middle Easts political stability linked to events in Iran could force up global oil prices, affecting food and transport costs in China. Producer price inflation will decelerate sharply in 2012, but it will be subject to upward forces in 2013-16 as a result of sustained domestic demand and policy- driven increases in state-mandated prices for fuel and utilities. Producer prices are nevertheless likely to rise by a modest 4.1% a year on average in the forecast period as the growing international supply of raw materials and food restrains increases in global commodity prices. There is a danger that speculative asset- price bubbles, notably in property or equity markets, could emerge in 2012-16. The risk is aggravated by low or negative real interest rates on deposits, which could encourage savers to put their money into other saving and investment vehicles. Exchange rates Chinas current-account and trade surpluses are both forecast to fall to modest levels as a proportion of GDP in the forecast period, and so the country will be in a strong position to resist external pressure to allow a faster rate of currency appreciation. Indeed, with the currency now probably close to market-driven levels, more volatility in the value of the renminbi is likely in 2012-16, including periodic bouts of depreciation. We now believe that, owing to higher produc- tivity growth in China than in the US, the renminbi will strengthen against the US dollar by an average of 1.9% a year in 2012-16, down from 2.7% a year in our last forecast. The shift partly reflects the strength of the US currency in the outlook period; the renminbi will appreciate more swiftly against the euro and the yen. A faster rate of inflation in China than in OECD markets will also help to rebalance the real exchange rate. External sector Chinas current-account surplus was equivalent to an estimated 2.9% of GDP in 2011, well below the peak of 10.1% reached in 2007. The surplus is expected to continue to shrink in the forecast period, falling to 0.2% of GDP in 2016. Although merchandise exports are forecast to rise by 11.6% a year on average in 2012-16, this will be well below the rate of expansion recorded in 2002-07, which averaged 29%. A large proportion of Chinas imports consists of compo- nents that are assembled domestically before being shipped overseas again, and the countrys imports and exports therefore tend to expand at similar rates. However, a growing proportion of merchandise imports are used to make goods that are consumed domestically, and, at an average of 13.5% a year, import growth will outpace export expansion in 2012-16. As a result, the trade surplus will fall to around US$162.8bn in 2016. The services deficit will widen considerably in 2012-16, largely reflecting a surge in overseas travel by Chinese tourists. The economy’s growing sophistication will see demand for imports of professional services increase rapidly, although exports of services will also grow, reflecting the rising earnings of Chinese companies working on infrastructure projects abroad. The current transfersCountry Report April 2012 © The Economist Intelligence Unit Limited 2012
  12. 12. 10 China account will remain in surplus in 2012-16, owing to the high level of remittances from overseas Chinese. As China tries to make the renminbi an international currency, controls on capital flows into and out of China are likely to be significantly relaxed in 2012-16. More quotas under the qualified foreign institutional investor (QFII) scheme will be granted than in the past as the government looks to deepen the local securities and bond markets. Forecast summary (% unless otherwise indicated) 2011 a 2012 b 2013 b 2014 b 2015 b 2016 b Real GDP growth 9.2 8.3 8.5 8.0 8.0 7.9 Industrial production growth 13.9 11.8 12.1 11.7 11.3 11.1 Gross agricultural production growth 4.5 3.0 2.8 2.9 3.1 2.6 Unemployment rate (av) 6.5 c 6.4 6.6 7.0 6.5 6.1 Consumer price inflation (av) 5.5 3.7 5.1 4.2 3.9 4.1 Consumer price inflation (end-period) 4.1 4.2 4.4 4.2 3.9 4.1 Short-term interbank rate (end-period) 6.6 c 6.8 7.3 7.6 7.6 7.7 Government balance (% of GDP) -1.1 c -1.8 -2.0 -1.7 -1.4 -1.3 Exports of goods fob (US$ bn) 1,903.6 2,057.8 2,306.5 2,593.6 2,935.5 3,286.3 Imports of goods fob (US$ bn) 1,659.8 1,832.0 2,101.4 2,393.6 2,758.2 3,123.5 Current-account balance (US$ bn) 201.1 169.0 144.6 97.5 60.0 34.2 Current-account balance (% of GDP) 2.9 c 2.1 1.5 0.9 0.5 0.2 External debt (end-period; US$ bn) 657.3 c 724.9 824.0 935.3 1,077.1 1,213.3 Exchange rate Rmb:US$ (av) 6.46 6.28 6.18 6.09 5.98 5.87 Exchange rate Rmb:US$ (end-period) 6.30 6.26 6.13 6.05 5.91 5.67 Exchange rate Rmb:¥100 (av) 8.10 8.13 7.68 7.52 7.29 7.08 Exchange rate Rmb:€ (end-period) 8.31 7.79 7.54 7.51 7.42 7.14 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.Country Report April 2012 © The Economist Intelligence Unit Limited 2012
  13. 13. China 11Quarterly forecasts 2011 2012 2013 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 QtrGDP% change, quarter on quarter 2.5 2.3 1.9 1.7 1.7 2.2 2.5 2.5 1.9 1.7 1.8 2.0% change, year on year 9.7 9.5 9.1 8.9 7.8 7.7 8.3 9.2 9.4 8.9 8.1 7.6Consumer prices% change, quarter on quarter 2.0 0.5 0.8 0.5 2.0 0.0 1.1 0.9 3.0 0.7 0.4 0.4% change, year on year 5.1 5.7 6.0 3.8 3.8 3.3 3.7 4.1 5.0 5.8 5.0 4.5Producer prices% change, quarter on quarter 2.3 3.0 0.4 -2.5 -0.6 2.4 2.9 1.9 1.4 0.6 0.1 0.1% change, year on year 7.0 6.9 7.1 3.1 0.3 -0.3 2.2 6.8 8.9 7.0 4.1 2.3Exchange rate Rmb:US$Average 6.58 6.50 6.42 6.34 6.31 6.30 6.25 6.26 6.23 6.20 6.15 6.13End-period 6.56 6.47 6.36 6.30 6.31 6.28 6.25 6.26 6.21 6.17 6.14 6.13Interest rates (%; av)Money market rate 4.6 5.0 5.8 5.7 5.2 4.7 4.7 4.8 4.8 4.9 5.0 5.3Country Report April 2012 © The Economist Intelligence Unit Limited 2012
  14. 14. 12 China Monthly review: April 2012 The political scene Legal reforms are introduced The annual session of the National People’s Congress (NPC, Chinas legislature) in March was the last before the process of handing power over to a younger generation of leaders begins in late 2012. Meetings of the full legislature provide an opportunity to debate a number of issues, even though the top leadership of the Chinese Communist Party (CCP) tends to make the final decisions on legislation, which is then rubber-stamped by the NPC. One of the biggest debates this year was that relating to a revision to the Criminal Procedure Law. The initial drafts of the law raised concerns that the changes could codify existing practices that enable harassment and abuse of dissidents. The final version of the measure does indeed allow suspects to be placed under a form of administrative detention, termed "residential surveillance", for six-month periods at secret locations. However, revisions now mean that, in most cases, the families of those held must be notified within 24 hours and suspects must have access to a lawyer within 48 hours. The new laws requirements remain far from the norms prevailing in most Western countries; for example, there is still no requirement that lawyers be present at police interrogations. Restrictions on the treatment of suspects also remain looser for cases involving national security—a broad and ill-defined term. There are nevertheless positive aspects to the new legislation. It requires interrogations to be recorded when severe penalties (such as execution or long prison sentences) are likely. Measures to exclude torture and illegally obtained evidence are included, and the right of defence lawyers to call and cross- examine witnesses is strengthened. Much of this is welcome, but in practice the police often disregard legal constraints on their behaviour, and there are few options open to those who wish to complain about such abuses. The CCP chief in Chongqing The reform of the criminal code came as the government announced in March is deposed that Bo Xilai had been removed as party secretary of Chongqing municipality, to be replaced by a national vice-premier, Zhang Dejiang. Mr Bos political future had been under threat since his right-hand man, Wang Lijun, was detained in February in a corruption probe. Mr Wang was formerly the police chief in Chongqing and championed Mr Bos campaign against criminal gangs in the municipality. However, he had been accused of riding rough-shod over due legal process during this drive. Mr Bos dismissal is a blow to the political agenda that he represented, in terms of both substance and style. Mr Bo has spent the past few years fostering a "red revival" in Chongqing, including public-morality campaigns reminiscent of the Cultural Revolution of the late 1960s and early 1970s. Yet frictions had arisen with other senior leaders who were put off by Mr Bos abrasive personality, his attempts to boost his authority within the party through populist campaigning among the wider public (in a system where closed-door, consensus-based decision-making is preferred) and his tendency towards flashy self-promotion.Country Report April 2012 © The Economist Intelligence Unit Limited 2012
  15. 15. China 13 Mr Zhang is a much more traditional politician. His time as party secretary of Guangdong province in 2002-07 was characterised by a number of missteps, including the covering-up of the severe acute respiratory syndrome (SARS) epidemic. Educated in economics in North Korea, Mr Zhang is also notorious for his hard line on media censorship. Although there is much in Mr Bos policies that can be criticised, his open and dynamic approach was genuinely popular among the public, and he had a tremendously positive impact on Chongqings business environment. As uncertainty about the implications of his fall swirls, much of the momentum that he imparted to the municipalitys economy—one of the fastest-growing in the country—may well be lost. Hukou reforms are promoted In February, ahead of the NPC, the government published a circular on reform of the household registration (hukou) system. This system currently makes it difficult for migrant rural labourers to gain permanent residence and access to social services in Chinas cities. The document suggests that population move- ments to large cities, such as the capital, Beijing, will still be controlled, but that migrants will now find it easier to register in smaller cities. In medium-sized cities, they will be able to register for residence permits after working for three years and paying social-security insurance for one year. The new regulations do not amount to the full abolition of the hukou system, as they allow cities to draw up their own rules based on their economic circumstances. However, the document marks a significant step in the process of matching the registration system to social realities. The new regulations reiterate that farmers should not be forced to give up their land rights, and that migrant workers should have access to some social services in cities. They also indicate that regulations restricting migrant workers’ access to education, employment and training should be adjusted. Ethnic unrest continues Unrest in China’s ethnic-minority regions has continued in recent months. In Xinjiang, home to the Uighur ethnic group, around 20 people died in a clash in the town of Yecheng in February. Uighur sources abroad suggested that at least seven of the victims were policemen, indicating that an attack on the police may have been intended, but Chinese authorities claim that the attack targeted civilians. Seven of the perpetrators were killed, and two arrested. The CCP secretary of Xinjiang, Zhang Chunxian, blamed the incident on "the infiltration of three overseas forces of separatists, extremists and terrorists". In Tibetan areas, protests against Chinese rule have recently taken the form of acts of self-immolation, three of which were reported in March in the Aba region of Sichuan province. In January it was reported that the police had opened fire on Tibetan protesters in parts of both Sichuan and Qinghai provinces. In addition to the self-immolations, in February it was reported that a young Tibetan had died after causing an explosion in a government building in a rural part of Sichuan province. In a development that may be linked to these incidents, in March a US-based non-governmental organisation, Human Rights Watch, noted that China had announced in early 2012 that government or CCP officials would be stationed in all Tibetan monasteries. The organisation claims that this overturns the nominal self-government system by which such monasteries have previously been run.Country Report April 2012 © The Economist Intelligence Unit Limited 2012
  16. 16. 14 China Economic policy Growth targets are lowered as Chinas premier, Wen Jiabao, delivered a report to the NPC in March outlining the economy slows the governments major economic goals for 2012. These included a real GDP growth target of 7.5%, moving nearer the forecast of average annual expansion of 7% that had previously been outlined in the 12th five-year plan (2011-15). Officials projected that inflation would average around 4% this year. On cue, year-on-year consumer price inflation slowed to 3.2% in February, from 4.5% in January. Job creation was also emphasised by Mr Wen in his report, which set a target of the creation of 9m new urban jobs in 2012. The total volume of imports and exports is projected to rise by around 10% this year, while the broad money supply (M2) will increase by 14%. The goals for M2 and GDP growth are slightly lower than in 2011, when they stood at 16% and 8% respectively, suggesting that government policy will remain slightly tighter in 2012 than it was last year. Traditionally the government sets conservative revenue and expenditure targets, with excess revenue being spent on priority areas, such as healthcare and education. Central spending on education last year, for example, at Rmb324.9bn (US$52bn) was 109.6% of the budgeted level, thanks to higher than expected fiscal inflows. The bulk of spending occurs at local government level, however. Local expenditure on education rose by 27.8% to Rmb1.5trn (US$240bn) in 2011. Other big items of local-level spending included social security and employment (up by 22.6% last year, to Rmb1.1trn), health (up by 33.1% to Rmb629.6bn), agriculture (up by 22.4% to Rmb947.3bn) and transport (up by 78.6% to Rmb714.1bn). Government spending on education and healthcare (Rmb bn) Education Healthcare 1,400 1,200 1,000 800 600 400 200 0 2003 04 05 06 07 08 09 10 Sources: Ministry of Finance; Haver Analytics. Education, health, social security and social housing are again set to be the main beneficiaries of higher public spending in 2012. Defence spending is to be increased by 11.4%, to Rmb650.3bn, but many experts believe that this sub- stantially underestimates expenditure in areas such as armaments procurement. The fiscal deficit in 2012 is forecast to reach Rmb800bn, including a Rmb550bn central deficit and Rmb250bn in local government debt issuance. The target might look ambitious, given slowing economic growth and the weak state of local government finances amid a decline in fiscal earnings from land sales.Country Report April 2012 © The Economist Intelligence Unit Limited 2012
  17. 17. China 15 However, Rmb263.8bn of above-budget revenue from last year was added to this years fiscal inflow, and this will ease the task of reaching the goal. Chinas local authorities had debts of Rmb10.7trn at end-2010, following the 2008-10 debt-financed stimulus spending splurge, but Mr Wen said in March this year that their outstanding debts had risen by just Rmb300m in 2011. Monetary policy continues to Following weak credit growth in January and February, the Peoples Bank of be loosened gradually China (PBC, the central bank) has continued its gradual relaxation of monetary policy. In late February the reserve requirement ratio for banks was cut for the second time since November 2011, lowering the ratio to 20.5% for large banks. In March the PBC raised target loan-to-deposit ratios for the Industrial and Commercial Bank of China and China Construction Bank, two of Chinas biggest banks. The move took the respective ratios for the two institutions to 63% and 70%, from 62% and 68% in 2011. It comes amid recognition that one of the main constraints on higher lending by Chinese banks is the conservative prudential ratios that they find themselves bumping up against. A think-tank report In February, ahead of the NPC, two important proposals for economic reform attacks SASAC were published, in what looked like an effort to influence debate not just at the congress but also in the months ahead of Chinas leadership transition later this year. One report was backed by the PBC, the Development Research Centre (a think-tank under the State Council, Chinas cabinet) and the World Bank. It was reportedly commissioned with support from Li Keqiang, who may play an important role in determining economic policy if he becomes premier in 2013 as expected. The report warned that China risks becoming caught in a middle-income trap, buffeted by inflation and instability, unless it intensifies economic reforms in a number of fields. It called for a number of changes, including moves to strengthen farmers land rights and improve labour mobility, that are relatively uncontroversial and fit well within existing government policies. However, the document also controversially advocated changes to address the role of state-owned enterprises (SOEs). It called for SOEs to be taken over by new, independent bodies that would hand over dividends to the state budget and gradually reduce the extent of state ownership. This represents a challenge to the State-owned Assets Supervision and Administration Commission (SASAC), which manages central-level SOEs but for political and administrative reasons lacks the authority to do so effectively. Financial reform makes Another pre-NPC call for economic reform was voiced by Sheng Songcheng, the headway at last head of the PBCs Survey and Statistics Department, in a report advocating a ten-year schedule of incremental reforms to open Chinas capital account. Mr Shengs report is just one of a number of publications which have indicated that the government is now pursuing capital account liberalisation with greater vigour. Indeed, its timescale may prove conservative, given the recent pace of opening. However, officials remain cautious about the potential for inward or outbound hot money flows to destabilise Chinas financial system. The State Administration of Foreign Exchange has estimated that a net US$3.1bn of hot money exited China in 2011, in contrast to net inflows of US$35.5bn in 2010.Country Report April 2012 © The Economist Intelligence Unit Limited 2012
  18. 18. 16 China Meanwhile, in the financial sector the new head of the China Securities Regulatory Commission (CSRC), Guo Shuqing, has made a storming start since his appointment in late 2011. Besides overseeing a sharp increase in the permitted level of foreign investment in Chinas security markets through the qualified foreign institutional investor (QFII) programme (including renminbi- denominated QFII flows from Hong Kong), Mr Guo has also advanced reform on several other fronts. In February the CSRC published for the first time a list of firms that had applied to list on Chinas stock exchanges. The CSRC has also declared that it will no longer participate in the initial review process for listings on Shenzhens ChiNext exchange for growth stocks. On top of this, in February China began simulated trading of futures in Treasury bonds, and the CSRC has confirmed that it expects to allow firms to start issuing riskier, high-yield "junk" bonds in 2012. The latter move may help to alleviate financing constraints on private-sector firms, which often find it harder than SOEs to secure finance from banks. However, the CSRC has signalled no new moves on the long- awaited international board that would allow foreign firms to list in Shanghai. Economic performance Data show slow growth, but Recent data continue to suggest that economic growth is slowing. Industrial sentiment remains buoyant value added output was up by 11.4% year on year in real terms in January- February—its slowest rate of growth in two years. This weak picture was underscored by modest year-on-year growth of just 7.1% in electricity generation in the first two months of 2012. Those of a pessimistic bent could point further to two important sectors, cement production and car retailing, that have both performed poorly in recent months, and to rising inventories of items such as copper and airconditioners. Moreover, China posted a trade deficit in January-February, although this partly reflected seasonal factors and the trade balance is expected to return to surplus as the year progresses. Nevertheless, the governments stance at the NPC appeared to show that officials are not particularly worried about the recent downturn, suggesting that it remains under control. In February the city of Wuhu in Anhui province became the latest local authority to be forced by the central government to backtrack on its planned loosening of restrictions on property purchases. The governments unwillingness to allow a significant easing of restrictions in the property sector, despite month-on-month falls in property prices and weak sales data, highlighted its comfort with the current pace of economic growth. On top of this, surveys of business confidence suggest a brighter picture. The official government purchasing managers index (PMI) stood at 51 in February (a reading over 50 indicates an expansion in business activity). A similar PMI produced by a UK-based financial firm, HSBC, also pointed to a modest rate of expansion despite weakness in export orders. In addition, that fact that in February imports rose by 39.6% year on year, to US$146bn—an extremely rapid rate of growth, even discounting for the boost linked to the timing of the Chinese New Year holiday period in 2012—suggests that commodity imports remain firm. This would seem to indicate that local producers are upbeat about the prospects for an imminent upturn in areas such as construction.Country Report April 2012 © The Economist Intelligence Unit Limited 2012
  19. 19. China 17 Shale-gas reserves are larger In March the Ministry of Land and Resources revealed that new surveys show than originally thought that China has an estimated 25.1trn cu metres of recoverable shale-gas reserves. Although seismic exploration has been under way for some time, so far no shale-gas project has reached commercial production. However, the National Development and Reform Commission said in March that it believes that output could reach 6bn cu metres a year in 2015, and 60bn-100bn cu metres by 2020. This could allow gas to take on a bigger role in energy provision, reducing the countrys dependence on coal—as well as its greenhouse gas emissions. In February the 12th five-year plan industrial template for the development of the solar industry was released by the Ministry of Industry and Information Technology. This envisages reducing the cost of energy generated by solar panels to Rmb7,000 (US$1,100) per kw by 2015. The government aims to have one solar company with annual sales of over Rmb100bn, and three to five with sales of at least Rmb50bn. The authorities will encourage consolidation among manufacturers of polysilicon and solar panels to promote efficiency—the sector is currently suffering from overcapacity and falling prices, and has been the subject of anti-dumping litigation in overseas markets. China overtook Japan as Asias biggest solar energy market in 2011, and is set to install around 5 gw of solar capacity in 2012.Country Report April 2012 © The Economist Intelligence Unit Limited 2012