China acts to reverse economic slowdown

Updated 17 June 2012

China acts to reverse economic slowdown

Recent production indicators in China have indicated further slowing in its economic growth. These negative signals are partly offset by an improvement in inflation and exports, according to QNB Group. China's economic trajectory should become clearer in the next few months and could have a significant impact on the global economy and the GCC.
In just a decade, China's economy has quadrupled in size, to become the world's second largest, with GDP of nearly $6 trillion. The real growth rate during this period has exceeded 10 percent.
Many factors have contributed to China's remarkable rise. A series of economic reforms, starting in 1978, legalized private enterprise and attracted foreign investment into export industries. This provided a spark to growth, from a low base, that was then fed by domestic investment in infrastructure and real estate. This dynamic was supported by a demographic dividend, owing to a boom in the working age population and migration from rural to urban areas, supplying industries with cheap and plentiful labor.
However, such high growth rates cannot continue indefinitely. The key question is whether China will gradually ease to a more sustainable growth rate, driven more by consumption than investment, or face a sharper and disruptive deceleration. The later "hard landing" scenario, often described as a prolonged period of growth below 7 percent, is widely seen as one of the most serious risks facing a fragile global economy.
China's rate of GDP growth has been on the decline since a recent year-on-year peak of 12.1 percent in the first quarter of 2010. That was a result of government stimulus and monetary easing which enabled a sharp rebound from fall in exports due to the global crisis. By the first quarter of 2012, growth had fallen to 8.1 percent, the lowest rate in a decade, barring the first half of 2009. Of particular concern was the services sector, which grew at the slowest rate in over two decades.
There have been further signs of weakness from other indicators such as the official Purchasing Managers Index (PMI) which recorded 50.4 in May. This was only narrowly above the 50 point mark which divides expansion from contraction. An alternative PMI survey, produced by HSBC, has been consistently indicating contraction since last October.
Another key indicator, the Business Climate Index, has also been weak and recorded 115.6 in the first quarter, its lowest level since the first half of 2009. Other indicators such as electricity consumption and retail sales have also been weak recently.
On the positive side, exports have been holding up better than had been expected, recording a 15.3 percent annual growth rate in May, more than double the median market forecast.
Furthermore, inflation fell to 3 percent in May, thanks in part to falling oil prices. This is its lowest level in nearly two years, and comfortably below the official target of 4 percent. Lower inflation potentially gives the government more room to deploy fiscal and monetary stimulus without causing an upward spiral in prices.
Indeed, the central bank has already made its first move, reducing interest rates by 0.25 percent on June 7, the first cut since 2008. It might look to make further cuts and to reduce bank reserve requirements, both measures aimed at boosting bank lending for investment and consumption, and hence supporting growth.
However, according to QNB Group, there are concerns that there may already have been overinvestment in some sectors, particularly in real estate, with a potential bubble in some parts of the country. Moreover, some companies and local government bodies may have taken on too much debt to fuel the investment boom.
Other government intervention includes subsidies on household appliances to encourage domestic consumption. It should become clearer during the summer whether or not the monetary and fiscal policy measures are able to check the declining growth rate.
China is a significant trade partner for the GCC. In 2011 it was the largest supplier to the region, providing 13.2 percent of imports, and also rose to become the third largest purchaser of GCC exports, consuming 9.9 percent. Its importance for Qatar is not as high, as it supplies just 5.8 percent of imports and purchases 4.1 percent of exports.
Nonetheless, QNB Group does not expect that a hard landing in China would lead to a substantial fall in its demand for GCC oil, just a declaration in the rate of demand growth. This is because the powerful trend towards increased Chinese car ownership is expected to continue. The ratio of cars to population in China is only about 7 percent, less than half the global average.
A sharp correction in the construction sector could, however, dent other global commodity prices, such as metals. This would harm metal exports from the GCC, but could also benefit many of the major infrastructure and real estate construction projects underway in the region, by reducing their costs.
Despite its problems, China still remains one of the brightest spots in a gloomy global economy. By comparison, two other emerging giants, Brazil and India, have produced disappointing data in recent months.
India's real GDP growth in the first quarter of 2012 was just 5.3 percent, and Brazil's was only 0.8 percent, as drought devastated its agricultural production. If China were to follow in their footsteps, then the period ahead for the global economy could be even more challenging than currently expected.

Wealthy Gulf individuals feel more confident about regional prospects

Updated 25 April 2018

Wealthy Gulf individuals feel more confident about regional prospects

  • “Factors like the region’s stability, attractive investment opportunities and low-tax environment are seen as the main drivers behind the growing confidence in the region’s economy.”
  • Among the most optimistic were respondents in the UAE, with 57 percent of those surveyed saying they thought the overall outlook was improving.

DUBAI: Survey finds growing optimism on region’s economies, but Saudi investors remain wary.

Wealthy individuals in the Gulf are more optimistic over the future of the region and the global economy compared with last year, and are increasing likely to invest in their own countries and other emerging markets in Asia than in western economies. These are among the main findings of an annual survey by Dubai-based Emirates Investment Bank (EIB), released on Tuesday, of the sentiment among high net worth individuals (HNWIs) in the region. 

After two years of falling confidence, some 60 percent of regional HNWIs now believe things will improve or stay the same. Fewer are pessimistic about both regional and global economic prospects than last year, while nearly 80 percent of respondents said they would prefer to invest in Gulf assets, rather than looking abroad.

The recovering oil price was a big reason for the increasing feel-good factor in the Gulf, according to Khalid Sifri, EIB’s chief executive officer, who added: “Factors like the region’s stability, attractive investment opportunities and low-tax environment are seen as the main drivers behind the growing confidence in the region’s economy.”

After falling below $30 per barrel in early 2016, oil has subsequently recovered to a three-and-a-half-year high, breaching the $75 a barrel mark yesterday for the first time since November 2014.

However, the overall optimism of the survey masks some concerns among regional HNWIs; in Saudi Arabia, 48 percent of respondents said that they saw the regional economic situation improving or staying the same, against 52 percent who felt it was likely to worsen in 2018.The survey was conducted last November and December, when investor sentiment in the Kingdom was affected by the high-profile anti-corruption campaign undertaken against some prominent business people accused of financial wrong-doing. “It may have been affected by that. We shall see what the situation is at the end of this year,” Sifri said. 

Respondents from Kuwait were even more pessimistic. None of the respondents from the country felt that things were going to improve on the investment front this year, while 54 percent said they would worsen. Among the most optimistic were respondents in the UAE, with 57 percent of those surveyed saying they thought the overall outlook was improving. On the long-term global outlook, a total of 78 percent of those surveyed across the region were optimistic about prospects over the next five years, with most citing positive economic and political stability as the reason, along with a smaller number who said oil price stabilization would benefit the world economy. The oil price recovery was the biggest reason for regional optimism. 

The geopolitics of the region was claimed as a big factor in deciding investment decisions, but Saudis were less concerned than others. Only 29 percent in the Kingdom said they were influenced by geo-political events, compared with 83 percent in Qatar and 85 percent in the UAE. 

Oil prices, economic reforms and the introduction of VAT were also factors influencing investment, as was the election of Donald Trump as president of the USA. There has been a big shift in global investor orientation outside the GCC. Nearly half of regional wealthy investors (47 percent) are now looking to Asia, 38 percent to the wider Middle East and North Africa, some 34 percent to Europe and only 17 percent to North America. The survey was conducted among 100 HNWIs with $2 million or more in investable assets.