China acts to reverse economic slowdown



Doha: Arab News

Published — Sunday 17 June 2012

Last update 17 June 2012 8:31 pm

| نسخة PDF Print News | A A

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.
 

What's happening around Saudi Arabia

JEDDAH: The government has installed 5,000 high-definition cameras on all floors and courtyards of the Grand Mosque to ensure security and crowd control.These cameras are monitored 24 hours a day by officers at a control center in Mina. They have to...
GENEVA: Saudi Arabia has welcomed the report of the International Fact Finding Commission on Israeli aggression in Gaza and has lauded its effort to prepare the report despite noncooperation from Israel which did not allow the committee to do its wor...
JEDDAH: Several Yemenis have praised the government for correcting their status quickly, which created no extra burden while fasting.Many who gathered in front of the Passport Department in Asir said everything was in place for them, a local newspape...
RIYADH: The $11.6 billion King Abdullah Financial District (KAFD) is already being admired for being a smart city but nobody can tell when it will be completed.“Being a smart city, everything is state-of-the-art. There is seamless Internet access and...
RIYADH: In a new move, the Ministry of Health will conduct drug tests on all drivers ferrying pilgrims between Makkah and Madinah during the Haj season.The decision was taken at a Haj preparatory meeting held on Sunday under the chairmanship of Imad...
JEDDAH: Motorbikes are among the most important means of transportation in Makkah during Ramadan because they are easy to use and cope easily with congestion in the central area next to the Grand Mosque. Despite the presence of public transportation,...
JEDDAH: A local man here runs a business started 150 years ago by his grandfather making sought-after Hijazi sweets for Eid and other festivals.Samer Jastaniah, 35, has three family shops making these products. “I am the grandson of the doyen of swee...
RIYADH: Saudi students have won six medals — a gold, a silver and four bronze — at the 19th Junior Balkan Mathematical Olympiad (JBMO 2015), securing the fifth place for the nation, as against 13th in its first participation in 2013.Rinad Abu-Jamal f...
Ambassador of Belgium Geert Criel:— Which particular aspect of Saudi Arabia you like the most? The friendliness of its people.— What is your favorite and oft-repeated Arabic word? Ahlan wa Sahlan.— Which book is by your bedside these days? World Orde...
AL-AHSA: Saudi farmers here need more support to buy fertilizers, medicines and equipment, and market their products.This is the view of Ahmed Al-Musalmi, who recently won the country’s ‘Ideal Farmer Award.’ He said high production costs and low mark...
JEDDAH: The Commission of the Promotion of Virtue and Prevention of Vice (Haia) has launched 20 initiatives aimed at improving the professionalism of employees and limiting individual interpretations and actions while carrying out duties.Sheikh Abdul...
RIYADH: Medical studies and research for new methods in the treatment of chronic diseases suggests that fasting could help combat cancer and boost effectiveness of treatment.Scientists doing research on the positive aspects of fasting discovered that...
RIYADH: The Ministry of Education has announced that Saudi universities would accept 95 percent of high school graduates, despite a royal decree four years ago setting a ceiling of 70 percent.The royal decree had approved the “Afaq Project,” a strate...
JEDDAH: With the first stages of the municipal elections set to launch in Dhul Qadah, various organizations and institutions are responding to the intensifying “election fever” by trying to get in on the action and making a strong presence on the sce...
AL-AHSA: The third annual Youth Nights Festival kicked off at King Abdullah Environmental Park in Al-Ahsa recently. Organized by the General Presidency of Youth Welfare (GPYW), in collaboration with Al-Ahsa Municipality, the festival targets 70,000 y...

Stay Connected

Facebook