China's steams ahead; Reforms enter critical stage

Industrial Output growth at quickest pace in 17 months

China’s industrial output grew at the fastest pace in 17 months in August and the broadest measure of new credit almost doubled from July as a recovery in the world’s second-largest economy gains traction.

Factory production rose 10.4 percent from a year earlier, the National Bureau of Statistics said in Beijing today, Aggregate financing was 1.57 trillion yuan ($257 billion), the central bank said, topping the median analyst estimate of 950 billion yuan. UBS AG said China’s liquidity and credit squeeze appears over, while Societe Generale SA said corporate and local-government debt is rising from already alarming levels.

Premier Li Keqiang said today that August data show a recovery trend, after the government used measures from tax cuts to extra spending on railways to defend the year’s 7.5 percent expansion goal. As Communist Party leaders prepare for a November meeting to discuss policy reforms, Li said that industrialization and urbanization will fuel growth, the official Xinhua News Agency reported.

“The government growth target appears within reach, which reduces the chance of stimulus and allows the government to focus on reform,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong.

The benchmark Shanghai Composite Index rose 1.2 percent to the highest close since June. The yuan was little changed at 6.1200 per dollar.

The gain in output compared with a median forecast of 9.9 percent in a Bloomberg News survey. The government doesn’t release separate industrial data for January and February, which are distorted by the Chinese New Year holiday.

‘Downside Risk’

“If credit growth picks up persistently from here, China’s current growth recovery may well last a bit longer and go a bit further,” said Yao Wei, China economist at Societe Generale in Hong Kong. “However, that only adds to the downside risk afterwards, as the leverage of Chinese corporates and local governments keeps rising from the already alarmingly high level.”

Industrial production topped all 45 analysts’ estimates in a Bloomberg News survey, with projections ranging from 9.2 percent to 10.2 percent, following a 9.7 percent gain in July. Thirty-nine of 41 industries reported growth, including a 13.6 percent gain in ferrous metals and 12.3 percent in chemicals, according to the statistics agency.

Steel production rose 15.6 percent in August, up from 10.9 percent in July, and electricity output expanded 13.4 percent, compared with 8.1 percent the previous month.

Retail Sales

Retail sales advanced 13.4 percent, while fixed-asset investment excluding rural households increased 20.3 percent in the January-August period, both topping estimates.

The median estimate for retail sales was a 13.3 percent advance after 13.2 percent in July. Fixed-asset investment was projected by economists to rise 20.2 percent in the January-August period, after a 20.1 percent gain in the first seven months of the year.

A separate report today showed China’s passenger-vehicle sales gained the most in four months in August, led by sales of sport utility vehicles. Wholesale deliveries of cars, multipurpose and sport utility vehicles climbed 11 percent to 1.35 million units, according to the state-backed China Association of Automobile Manufacturers today.

China’s exports rose 7.2 percent from a year earlier, the General Administration of Customs said Sept. 8. That exceeded the 5.5 percent median estimate of analysts. At the same time, imports rose a less-than-estimated 7 percent from a year earlier, leaving a trade surplus of more than $28 billion.

Inflation, Stimulus

Consumer prices rose 2.6 percent in August, the statistics bureau said yesterday, leaving room for extra stimulus if needed. The producer-price index (SHCOMP) fell 1.6 percent, the least since February.

Premier Li, in an opinion article published yesterday in the Financial Times, said the economy “will maintain its sustained and healthy growth,” with expansion around a 7.5 percent “lower limit” intended to ensure steady growth and employment.

Goldman Sachs Group Inc. last week raised its estimate for China’s economic growth for the third and fourth quarters, citing improving global demand and a stronger-than-expected domestic industrial recovery. JPMorgan Chase & Co. and Deutsche Bank AG raised their growth forecasts over the past month, bolstering optimism that Li will meet the government’s target for expansion this year.

Analyst Forecasts

Analysts surveyed by Bloomberg News last month gave a median estimate for 7.5 percent expansion this quarter and 7.3 percent in the October-December period.

China’s top solar-panel makers are returning to profitability following two years of losses as higher demand and prices drive up margins. JinkoSolar Holding Co. last month reported second-quarter net income of $8 million, its first profit since the third quarter of 2011, as sales jumped 43 percent from a year earlier.

In other economies today, French industrial production unexpectedly fell in July from the previous month, while Italy released final figures for second-quarter gross domestic product that showed a deeper contraction than initially estimated.

- Contributed  by Bloomberg News

 Reforms enter critical stage, says Premier Li Keqiang 

Finance-sector restructuring poses the greatest challenges as drive moves into 'deep-water zone'

Premier Li Keqiang says Beijing's economic restructuring drive has entered a critical stage, with an overhaul of the financial sector one of the most important and most complicated tasks to be tackled.

Indicating concerns that the world's second-largest economy might decelerate too much as overdone, Li said the central government was confident it could meet this year's economic goals through structural reform, ruling out the need to significantly loosen fiscal or monetary policy to stimulate short-term growth.

Financial reform is an important part of economic system reform. It is a complex, systemic project

In his opening speech to the World Economic Forum in Dalian yesterday, Li also said the government would seek to identify the core issues in reforms, which, once implemented, could exert a major impact on the entire process.

"Financial reform is an important part of economic system reform," he said. "It is a complex, systemic project, and because it is such a complex, systemic project, it means China's reforms have entered a deep-water zone, or the most difficult phase." In the next stage, he said, the key was to stick to market-oriented principles. The government would "actively and steadily" push forward with interest rate and exchange rate liberalisation, promote the yuan's convertibility under the capital account, and ease barriers for new, smaller players to enter the state-dominated financial industry, he said.

The steps already taken by Beijing to stem a sharp slowdown in economic growth had had an effect, he said.

"Some people expressed concern about whether China's growth might decelerate too fast, as some other countries experienced, or even see a so-called hard landing," he said.

But Li said the economy's fundamentals were "sound" and its operations stable.

The mainland's economic growth cooled to 7.5 per cent in the second quarter, from 7.7 per cent in the first and 7.9 per cent in the fourth quarter of last year, hit by global headwinds and excess capacity at home.

Since then, Beijing has cut tax for small companies, boosted investment in railways in poorer regions, and raised spending on urban facilities, while maintaining its grip on credit growth.

Industrial output growth jumped to a 17-month high last month while export growth quickened, suggesting a solid recovery in economic dynamics.

Li also said that local governments' borrowings, highlighted by analysts as an area of concern for financial risks, remained "safe and controllable".

- Contributed by Victoria Ruan South China Morning Post

Premier Li Keqiang's Profile:

Li Keqiang, born in 1955, became China's premier in March 2013. Like ex-president Hu Jintao, his power base lies with the Communist Youth League, where he was a member of the secretariat of the league’s central committee in the 1980s and later in the 1990s the secretariat’s first secretary. His regional governance experience includes a period as vice party boss, governor and party boss of Henan province between 1998 and 2003 and party boss of Liaoning province beginning in 2004. He became vice premier in 2008. Li graduated from Peking University with a degree in economics.

Many teachers not fit to teach, Malaysia Education Blueprint 2013-2025?

SHAH ALAM: About a third of English Language teachers in the country have been classified as “incapable” or “unfit” to teach the subject in schools.

Education Minister II Datuk Seri Idris Jusoh said such teachers had been sent for courses to improve their proficiency in the language.

“The ministry will also consider sending them overseas for exchange programmes to take up TESL (Teaching of English as a Second Language) courses,” he said during a dialogue session on the National Education Blueprint 2013-2025 held at the Karangkraf headquarters here yesterday.

Idris, who did not state the number of such teachers, assured that a good portion of them had enrolled in English courses locally.

Recently, it was revealed that about 70% out of the 60,000 English Language teachers, who sat for the English Language Cambridge Placement Test, performed poorly.

On allegations that the Government was sidelining vernacular schools through the blueprint, Idris denied this, saying “all schools were treated equally”.

“We do not sideline any party. In fact, the ministry encourages everyone to learn more languages. Be it Chinese, Tamil, French or Spanish, the government will be proud if a Malaysian can master these languages,” he stressed.

The United Chinese School Committees’ Association of Malaysia (Dong Zong) protested against the blueprint, saying that increasing teaching time for Bahasa Malaysia from 270 minutes to 300 minutes for lower primary and 180 minutes to 270 minutes for upper primary pupils was a move by the Government to eradicate mother tongue education.

- The Star/Asia News Network

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Emerging economies in turmoil

The G20 Summit last week discussed a new phenomenon – economic turmoil beginning in some major developing countries – even as coordination to prevent future crises is still elusive.



WHAT a difference half a year makes. At the G20 Summit last week, attention turned to the weakening of the emerging economies.

This was a contrast to previous summits. Then, the major developing countries were seen as the drivers of global growth, as the developed countries’ economies were faltering.

For two years or so, the European crisis was the focus of anxiety. The American economy was also plagued with domestic problems. The economies of the developing world, including China, India, Brazil and Indonesia and other Asean countries, were the safety net keeping the global economy afloat.

But in its report for the G20 summit in St Petersburg, the IMF had to do an embarrassing about-turn. It reversed its previous theory that the emerging economies were on the fast-track and keeping the global growth going.

It now warned that the stagnation in these countries is now a drag on the global economy.

Developing countries’ leaders correctly point out that their economies have been victims to the developed countries’ monetary policies, especially the United States’ “quantitative easing” (QE), under which the Federal Reserve has been pumping US$85bil (RM283bil) a month into its banking system.

A lot of this ended up in developing countries’ equity and bond markets, as US investors searched for higher yields there, since the US interest rates have been kept near zero.

However, when the Fed chairman indicated the QE would be “tapering off” and long-term interest rates started rising in response, the capital invested in developing countries has been flowing back to the US.

Vulnerable emerging economies have been hard hit, and worse may yet come. Especially vulnerable are those which have a current account deficit, since they depend on capital inflows to fund these deficits.

The outflow of needed capital and the increased risk have caused their currencies and their stock markets to plunge. This in turn leads to more capital outflow, due to anticipation of further falls in equity prices and in the domestic currency itself. The currency depreciation also fuels inflation.

Thus, former stalwarts India, Indonesia, Brazil, South Africa, Turkey are now the victims of a vicious circle.

In Indonesia, the currency fell last week across the 11,000 rupiah to the dollar mark (it was 9,500 a year ago), as the July monthly trade deficit rose to US$2.3bil (RM7.6bil) and the annual inflation rate hit 8.8% in August.

In India, the currency fell to 68 rupee to the dollar (from 56 a year ago) before recovering to 65 rupee after a well-received inaugural media conference by the new Central Bank Governor last Thursday.

India’s current account balance is running at around US$90bil a year, making it very dependent on capital inflows.

In mid-August, the government introduced limited capital control measures including restricting citizens’ money outflows to US$75,000 a person (from US$200,000 previously) and restraining local companies’ investments abroad.

The current account deficits are also significant in South Africa (US$25 billion in latest 12 months), Brazil (US$78 billion) and Turkey (US$54 billion), making them vulnerable to the vagaries of capital flows.

The South African rand has fallen in value by 18%. President Jacob Zuma blamed the currency slide on the potential tapering of the US quantitative easing.

“Decisions taken countries based solely on their own national interest can have serious implications for other countries,” he justifiably complained.

Malaysia’s currency value has also dropped recently, but the country is not as vulnerable as it has been running a current account surplus (US$14.2bil in the 12 months to June). However, the trade surplus has not been as strong recently and there is always a danger of “contagion effect”, which we know is often not based on rationality.

Countries affected have a few policy tools to deal with the situation. One is to try to stabilise the currency through the Central Bank purchasing the local currency by selling the US dollar.

But this is expensive, and the country may draw down its reserves, especially if speculators keep betting that its currency will fall by more. This is the bitter lesson that Thailand and others learnt in the 1997 financial crisis.

Another policy measure is capital controls. Ideally this should be imposed to prevent inflows.

But most countries allow the inflows in the good times, and then when these suddenly turn into outflows, the boom-bust problem if laid bare.

Malaysia in 1998-99 imposed controls on outflows of both residents and foreigners, which was effective in stopping the crisis. It was heavily criticised at that time, but now even the International Monetary Fund is recommending capital controls if the situation is bad enough.

Ultimately there has to be international reforms to prevent excessive capital flows from the source countries, and developed countries have to be disciplined so that their economic policies do not have negative fallout effects on developing countries.

But we will have to wait for such useful international coordination on capital flows and economic policies to take place.

Contributed by Global Trends, Martin Khor

> The views expressed are entirely the writer’s own.

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