Economy of China:

China's GDP growth expected to be lowest in 24 years

China's economic growth rate is likely to cool further this year, restrained by sluggish lending, a housing slump and weak global demand, a Reuters poll showed.China's economic growth rate is likely to cool further this year, restrained by sluggish lending, a housing slump and weak global demand, a Reuters poll showed.

China's economic growth rate is likely to cool further this year, restrained by sluggish lending, a housing slump and weak global demand, a Reuters poll showed.

The world's second-largest economy is predicted to grow 7 percent in 2015, and slow further to 6.8 percent next year, according to the median consensus of over 40 economists polled Jan. 15-19.

On Tuesday, data are likely to show China's economy expanded 7.2 percent in the final quarter of 2014, the weakest in 24 years.

Beijing is in the midst of its worst downturn in a generation, induced in part by government efforts to transform the economy away from a heavy reliance on investment and exports and towards consumption and services.

But a falling property market, brought on by oversupply and overinvestment fuelled by an unprecedented borrowing binge that helped China through the worst of the global crisis, was not planned.

If the Reuters consensus forecast for fourth-quarter growth is met, that would mean full-year growth for 2014 will have undershot the government's target of 7.5 percent and mark the weakest annual expansion in nearly a quarter century.

While only a matter of sums now that 2014 is over, that would increase the clamour for Beijing to ease policy even further.

Economists in the poll predicted the People's Bank of China will cut banks' reserve requirement ratio (RRR) by 50 basis points each quarter until October, to free up more cash for banks to lend.

That follows an interest rate cut to 5.6 percent late last year. Economists predict the benchmark lending rate will likely be lowered again to 5.4 percent in the second quarter.

A further slowdown in China could throw into risk chances of a revival in global growth in 2015, which right now is being led by what the World Bank calls the "single engine" of strong hiring and economic activity in the United States.

Indeed, economists in a Reuters poll last week said weaker growth than previously forecast in China and the euro zone were the biggest risk to the global economy this year.

"Even with continuing public sector investment and the significant benefits accruing to lower-priced oil imports, the softening in real estate activity alongside efforts to rein in lending highlight the risk of even slower growth," said Sacha Tihanyi, economist at ScotiaBank in Hong Kong.

Investment flows into China are an important gauge of the health of the global economy. They rose just 1.7 percent last year, sharply lower than the 5.3 percent growth in 2013.

Credit growth has also lagged expectations despite the surprise rate cut by the central bank in November as cautious banks remained reluctant to lend due to a spike in companies' debt levels and bad loans.

Beijing has traditionally relied on credit to fuel the economy but the broader slowdown has also diminished industries' appetite for fresh loans.

The central bank on Friday said it would lend 50 billion yuan ($8.1 billion) to banks for the purpose of lending the money on to farmers and small businesses, areas of the economy that are usually short of cash.

The protracted slowdown is also compounded by fears China's property market correction might turn into a crash that would ripple through the highly leveraged economy.

The housing sector makes up about 15 percent of the economy and cooling activity there has crimped demand in 40 sectors ranging from steel to cement and furniture, becoming the single biggest drag on domestic activity.

Since September, house prices in China's largest cities have on average been falling on a year-earlier basis and data on Sunday showed new home prices fell significantly last month.

Consumer price inflation is also likely to remain muted through the year, largely due to sluggish domestic demand and a slump in global energy and commodity prices.

The poll showed inflation will likely average 2 percent this year and 2.5 percent in 2016.

That mirrors a disinflation trend currently gripping the largest economies - prices have begun falling outright in the euro zone - and could pose a threat to economic activity, economists said.

Economists are idiots... slowest growth in 24 years means nothing when the last few years they have had the highest growth in their last 5 or 10,000 years.

China’s Yuan Joins Top Five Payment Currencies

China Passes US to Become World's Top Foreign Investment Destination

China became the world's leader in foreign direct investment (FDI) volume in 2014, according to the report of the United Nations Conference on Trade and Development (UNCTAD).

MOSCOW, January 30 (Sputnik) — China passed the United States to become the world's leader in foreign direct investment (FDI) volume in 2014, the United Nations Conference on Trade and Development (UNCTAD) report showed.

China's FDI volume grew by three percent in 2014 to $128 billion, while the United States dropped to $86 billion, a fall of almost a third since 2013. The decrease of US FDI volume is due, in part, to share buybacks from UK Vodafone by the US telecommunications company Verizon, the report suggested.

China's economy has posted annual GDP growth reaching 7.7 percent in 2010-2014, according to the World Bank.

Globally, FDI volume dropped eight percent in 2014 to $1.26 trillion. This drop is said to be a result of general economic uncertainty and geopolitical risks associated with regional conflicts, according to the report.

FDI in the European Union rose 13 percent while Russia, as a result of poor economic outlook, dropped to $19 billion, a 70 percent decrease, UNCTAD said.

UNCTAD is a United Nations institution researching global economy and promoting dialogue between countries on economy and development issues. UNCTAD currently has 194 member states.

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Chinese Currency Devaluation Prospective Grossly Exaggerated

The Chinese currency volatility does not mean the yuan will be hit by the depreciation trend.

Although the Chinese yuan has been falling against the US dollar since the beginning of this week, concerns over the currency fluctuation are grossly exaggerated according to China's experts

As the yuan continued its slide against the US dollar nearly reaching the alarming two-percent flotation ceiling, the question raises whether the Chinese currency will be hit by the longstanding devaluation trend.

However, China's economic experts dismiss the speculations as groundless, explaining that the yuan's recent volatility was caused by the European Central Bank (EBC) quantitative easing and interest rate cuts in Australia, Denmark and Canada, aimed at prevention of recession risks. According to

The International Monetary Funds' estimates, in 2015 developed countries will face deflation accompanied by slowdown in consumption growth.
While a weaker currency may bolster the country's economic development and boost its exports, Beijing is not interested in the sharp decline in the yuan, citing concerns over possible capital outflow.

Analysts point out that while the yuan was falling against the dollar, it concurrently surged up against such currencies as the British pound, euro and Japanese yen. The trend indicates that while the yuan is generally preserving its positions the US dollar is growing fast. Experts foresee that the ECB monetary easing will lead to further devaluation of euro and Japanese yen, adding that the yuan will obviously "grasp the chance" and continue its rise against them.

The Chinese currency has been consistently growing against the dollar since July 2005, bolstered by China's major foreign exchange reform. After the temporary slump the yuan will regain its leading positions over the next year due to the country's trade surplus.

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China may Sign Free Trade Zone Agreements With South Korea, Australia

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Key EU Countries Join China-Backed Bank Despite US Protests

Three more European countries have decided to join the Asian Infrastructure Investment Bank (AIIB), proposed by China.

France, Germany and Italy made a decision to join the financial institution, following the British announcement to become a founder member of AIIB last week.

The AIIB is a multilateral financial institution initiated by China in October 2013. The bank is designed to provide financing for infrastructure projects in the Asia-Pacific region and is sometimes viewed as a competitor to major development institutions as the World Bank and the IMF.

“China needs this project […] to protect its financial system from possible economic fluctuations on the international arena,” Graziani Tiberio, President of the Institute of Advanced Studies in Geopolitics and Auxiliary Sciences in Rome, told Sputnik Italia, adding that the bank would give Beijing an opportunity to strengthen its position among BRICS countries.

Nearly 30 states have declared their participation in the new financial institution, which expected to start its work in 2015.

However, the increasing support for the new bank from leading European countries has dissatisfied the United States.

Participation of several EU countries in the AIIB, the Italian expert claims, creates serious competition with the US. “The US goal is to achieve full economic hegemony in the EU, on the one hand, and to contain China, on the other” Tiberio said. “Ultimately, [it] seeks to determine all economic dynamics in the East,” the expert added.

The US recently expressed concerns that China may use the bank to expand its influence in the region and that the standards of governance in the newly established institution may be insufficient. In response to the US concerns, Chinese Foreign Ministry spokesman Hong Lei stated last week that all operations carried out by the AIIB will be open and transparent.

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China’s Potential Deflation Threatens to Overthrow Global Monetary Order

Mainland China could soon implement a full-scale economic stimulus due to the threats of deflation and stagnation, adding to the piles of cash being printed by Japanese and European mints, rendering monetary equivalent less valuable and investment less powerful across the globe.

Kristian Rouz – People’s Bank of China (PBOC) governor Zhou Xiaochuan, speaking at a forum of the nation’s high-ranking officials and top businesspersons on the Chinese island of Hainan in Sunday, admitted the Communist nation is falling into the mire of deflation at a faster pace than might be expected.

Coupled with the dramatic slowdown in the nation’s real economy, the threat of deflation might prompt the Chinese central bank to implement a full-scale stimulus, also known as ‘quantitative easing’ or QE, in the nearest future. Despite the fact that stock markets would eagerly welcome such a scenario, the Chinese QE, coming against the background of similar policies in Europe and Japan, might have dire effects on the global economic outlook, significantly impairing living standards all across the globe.

Despite this, Beijing has undertaken several limited-effect policies of monetary easing, such as allowing more renminbi-denominated liquidity in the economy by lowering the reserve ratio requirements (RRRs) for certain banks, the deflatory pressure has eased only somewhat with prices at the factory gate still declining and the overall economy slowing far below the demographically-dictated minimum growth threshold of 8%. The PBOC even cut its base interest rate twice since November, but, as the economy weakens further, full-scale QE is looming as the only solution

"Inflation in China is also declining. We need to have vigilance if this can go further to reach some sort of deflation or not," Zhou said, rendering the nation’s top policymakers considering further monetary easing moves, necessary to fend off the deflation and spur the overall economy.

Zhou’s comments suggest that China is now moving into the territory of a constant near-deflation and a stagnant economy where Japan had been for nearly 20 years, from the early 1990s to the early 2010s, until ‘Abenomics’ allowed for the island nation’s gradual return to a normal growth as a post-industrial society.

As the Eurozone and Japan are increasing the volume and pace of their QE programmes, and the US is only gradually exiting the era of their own ultra-easy monetary policy, the addition of China to the ‘QE club’ entails serious risks for the global economy. From the very advent of the global economic meltdown in 2008 up to this point, China has been doing well economy-wise through excessive borrowing, having accumulated a total debt of 280% its GDP, as well as having nurtured a vast and uncontrollable sphere of shadow banking and grey economic activity. Now this debt-fueled model does not seem to work as global demand for the made-in-China goods has shrunk to the point where a lot of output is piled up at the factory gate with an ever-fading price tag.

A structural reform, aimed at attracting investment money and technology from outside the mainland might have become an answer for China, but such a reform, also labeled as ‘liberalization’ by its opponents, would jeopardize the political dominance of the Communists in Beijing, something they can’t have happening to them. Nonetheless, the PBOC head Zhou remarked that a certain liberalization is a must, namely a liberalization in the interest rate. Deposit rates might be freed of the excessive governmental supervision within a year or two, he said. However, there is no timetable possible as the totalitarian regime cares the most about its own survival more than anything else, even in dire economic environment.

That said, QE is a perfect solution for the Communists in Beijing. Monetary Easing would spur inflation by devaluing the population’s real income, something America had witnessed in 2008-2013 and what Japan and the Eurozone might have experienced had they not been the huge exporters of industrial and hi-tech goods that they are.

Given that mainland China is the world’s second-biggest economy and also the one of the greatest global debtors, a vicious round of money-printing might disrupt the existing balance between the world’s monetary-conscious economies (the US, the UK, Switzerland) and the easing-reliant economies (the Eurozone, Japan, Australia). With China aboard, the easing-reliant part of the equation will prevail, resulting in the global economy producing amounts of money liquidity far exceeding the investment-absorbing capacity of the more healthier economies. Consequently, a lot of the non-backed by the real growth money will be kicked back and forth, ultimately impairing the cost of human labour and economic ventures.

“The long-term consequences of global QE are likely to permanently impair living standards for generations to come while creating a false illusion of reviving prosperity,” the recent Bank of America Merrill Lynch implies. According to the BofA, estimated, global economic growth might dip into negative in 2015 for the first time since the recession of 2009 due to the excessive worldwide use of unorthodox monetary policies. Encouraged by America’s successful QE experience, policymakers in Brussels and Tokyo have been eager to pump more money into their own economic systems, but add China here, and everything is deteriorating.

Unless the monetary-conscious side of the global equation in joined by a certain global economic heavyweight, like Brazil, or Russia, or – which is a most likely prospect, ‘the next big thing’ – India.

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Yuan Devaluation Attempt to Counter Weakening Euro, Yen - Think Tank

A report by US-based Stratfor (Strategic Forecasting) think tank says that the devaluation of China's yuan is an effort to neutralize the impact of a stronger dollar against the euro and the Japanese yen.

WASHINGTON (Sputnik) — China's devaluation of its national currency, the yuan, is an effort to neutralize the impact of a stronger dollar against the euro and the Japanese yen, according to a report by US-based Stratfor (Strategic Forecasting) think tank.

On Wednesday, the People's Bank of China (PBC) devalued the yuan for a second consecutive day.

"In Europe and Japan — home of the other two paramount global currencies — quantitative easing and other forces have resulted in a depreciation of the euro and yen against the dollar. The yen has fallen by about a third since the last half of 2012, and the euro has fallen by a fifth since early 2014. This means that the yuan's real effective exchange rate, or its exchange rate weighted against its trading partners, has appreciated dramatically over the past year," Stratfor report obtained by RIA Novosti read.

According to the report, PBC move had a negative impact on China's trade surplus, its macroeconomic indicators and triggered economic slowdown.

"China is clearly signaling that it will not move in step with the United States and will allow its currency to trade lower if need be," the report added.

Stratfor analysts stressed that China's actions on the currency market have caused concern among international traders. They also recommended Beijing to change its economic policy in order to enhance the credibility of the country in the global financial arena.

On Tuesday, the PBC allowed the yuan to fall 1.9 percent against the US dollar to boost the country's economy, precipitating the biggest one-day exchange rate adjustment for the currency in a decade. Wednesday's dollar-yuan exchange rate showed a further 1.6-percent decrease.

The International Monetary Fund (IMF) has welcomed China’s move to devalue the yuan, but indicated that the Chinese currency must float freely to gain market relevance and effectiveness.
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Reform of China’s public companies to fuel economic growth

MOSCOW, September 17. /TASS/. China’s just-unveiled government plan for reforming large public companies is expected to raise their profitability and competitiveness, fuel economic growth and draw private investors, including foreign ones, polled experts have told TASS.

The public companies are focused on all key industries of the Chinese economy - aircraft-building, ship-building, energy, auto manufacturing, steel, chemistry, construction and coalmining industries. On Monday, China’s President Xi Jinping said it was the public sector that he saw as the key factor for national economic growth.

In accordance with Chinese government plans the watchdog supervising and managing the assets of more than 100 largest public companies will be reformed first thing. The public companies’ assets in 2008-2013 were up by 90% to 25.1 trillion yuans, while profitability was at a tiny 11.6%, in contrast to 25.7% profitability in the private sector. Promising public companies will be allowed to be more active in borrowing private capital and participating in public-private partnership schemes, the Central Committee of the Communist Party of China and the State Council said in a joint statement.

The deputy director of the Institute of World Economy and International Relations under the Russian Academy of Sciences, Yevgeny Gontmakher, said the Chinese authorities’ intention to reform state corporations was a natural mode of action for a country that really sought to achieve economic growth. "The Chinese economy has demonstrated stable growth of 6-7% a year, but now it has hit the ceiling and in an attempt to invigorate it the Chinese government made a decision to decontrol the public sector a little bit more to make it more effective," Gontmakher told TASS.

"China’s economic sector over years was related with the development of small businesses in agriculture, the light industry and trade. At the same time the state preferred to keep a tight grip on the strategic industries - oil, gas, and machine building. As a result they lost effectiveness. The same phenomenon had been observed in South Korea before. That country managed to turn itself into one of the most successful ‘Asian tigers’ only when Seoul abandoned the model of comprehensive state control of all industries," Gontmakher said.

He believes it is not accidental China keeps quiet about the details of the plans for reforming the public sector or the deadlines when they might be implemented. It merely states that certain results are to be achieved by 2020. "The point at issue is drawing investment, in particular, foreign; the public companies must be ‘streamlined’, their budget made transparent, and some managers replaced before investors can be invited. This process will take a while," Gontmakher said. "Besides, this is not the right time for selling stakes in public companies on the world market. The situation is poor. It would make sense to take a pause," he added.

"Should Russia follow in China’s footsteps to reform its own public corporations is a matter requiring further studies and public discussion. Russian public companies, just as their Chinese counterparts, are ineffective and need systematic budget subsidies. But each of them requires individual treatment. Even though 100% stakes in some Russian companies belong to the state, it should be analyzed first whether they should be privatized entirely or selling a 20% stake would be enough. There should be no time-serving considerations," Gontmakher believes.

The chairman of the VTB bank’s observer council, Sergey Dubinin, has said that until just recently the Chinese authorities had allowed private investors only into special zones and certain branches of the economy, while the state retained all commanding positions in the economy. "Western economists and bankers have long doubted China’s economic growth rates and the effectiveness of public companies with their high costs. ‘Who will ever need them?" some were asking. In the end China made a decision in favour of cutting spending on support for the public sector and raising its profitability and shareholder value. It should not be ruled out that the news of the forthcoming reforms was announced on the eve of the forthcoming state visit the Chinese leader is to pay to the United States on September 22-25. China keeps its main assets in US treasuries," Dubinin told TASS.

"However large China’s reserves may look, the country still lacks resources for social programs, science and education. The Chinese authorities may have now decided time is ripe to slash budget infusions into the economy, which is now expected to grow at the expense of private investment. It is quite possible the reforms of public companies will result in some sort of privatization of infrastructural branches and the banking sector. This will benefit China’s own economy, as well as the world and Russian markets," Sergey Dubinin said.

Vneshekonombank’s deputy president, Sergey Vasiliev, told TASS: "As a representative of a public corporation I find it much easier to do business with Chinese public companies, and not private ones. The main problems of cooperation with China stem not from different types of ownership, but from cultural dissimilarity and the language barrier."