Macroeconomic moves in China

I am cross-posting this from the Economics blog as I think it should be useful for BUSS4 students; in a rather low key report on the BBC website this week, I found the shock news that China had a trade deficit of $23bn in February. This is alongside the HSBC Purchasing Managers’ Index (PMI) which focuses on small privately owned businesses, and which gave a reading of 48.1 for March, compared to 48.5 in February - with any figure below 50 indicating a contraction in manufacturing activity. And today there is a forecast of the ‘official’ PMI, which looks at the larger state-owned factories; although this is slightly over the ‘expansion’ measure of 50, it is only predicted to come in at 50.3 - and is subject to a 0.3 downwards correction to allow for seasonal patterns, according to Louis Kuijs, chief China economist at the Royal Bank of Scotland.

The Chinese government have set a GDP growth target of 7.5% for the year, and there is increasing speculation that in order to meet this, they will need to add some stimulus measures to their management of the economy. The government wants to change the pattern of economic activity, and reduce the economy’s dependence on exports and enhance the role of domestic consumption, which might sound attractive to businesses seeking to find export markets in China, but the measures to achieve that rebalancing are likely in the short term to sacrifice some growth, making the 7.5% target difficult to reach.

The government have suggested that they might loosen monetary policy in order to encourage and maintain growth. But there is a conflict here - China’s growth has been largely financed by debt (as highlighted in Robert Peston’s programme How China Fooled the World a month or so ago) and with the debt to GDP now standing at 200%, moves to curb borrowing are supposed to be underway - which would be at odds with looser monetary policy. Are there risks of insecurity replacing confidence? The chairman of China International Capital Corporation discusses that here, and meanwhile the FT reported on Wednesday that hundreds of depositors raced to pull their cash from a small rural bank in eastern China, forcing local officials to take emergency measures to calm the panic after the bank run began to spread. It was only a very small local lender, but the article warns of the risk of further defaults in the future.