China Business Forecast Report Q2 2009

Publication Date	March 2009
Publisher	Business Monitor
Product Type	Report
Pages	70
ISBN Number	1744-8778
Product Code	BMI03505

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Summary

Slowing Growth To Bring Rising Political Risk

Economic growth dipped to a seven-year low of 6.8% in Q408, dragging full-year growth for 2008 to 9.0% - a sharp decline from the 13.0% recorded in 2007 and the first time since 2002 that the world's current third largest economy had failed to register double-digit headline growth. However, the bad news does not stop there. Recent macroeconomic data has shown that economic activity continues to cool; and we do not foresee any turnaround in fortunes for the Chinese economy until the second half of 2009 at the very earliest, highlighting that it is more likely to be 2010 before a recovery gets underway. With this in mind, we expect real GDP growth to slow to 5.6% in 2009, before recovering to 6.8% in 2010.

Rapidly slowing economic growth could pose a significant challenge to political stability in China in 2009. Anecdotal evidence has already suggested that social unrest linked to rising joblessness is on the rise in China, and with the economic climate forecast to weaken further, public frustration is only likely to increase. While any such disturbances are likely to be confined to economic concerns, at least initially, we see a risk that activists campaigning on other issues such as human rights, corruption and Tibet could use the protests as platforms to further their own causes. This raises the prospect of widespread social upheaval, which could receive a heavy-handed response.

In view of the increasingly dismal outlook for the Chinese economy, we are expecting further aggressive monetary easing and fiscal stimulus to be rolled out as Beijing tries to avoid a dramatic slump.

However, given the lagged effects of any such moves, and the immediacy of China's problems, we fear that they will not have the desired effect. Indeed, with approximately CNY3.1trn of China's mammoth CNY4trn (US$585bn) fiscal stimulus package earmarked to be spent on infrastructure projects in their various guises, it is difficult to see how Beijing will be able to successfully front-load its additional spending given the length of time required to put construction projects into action.

Having joined the World Trade Organisation (WTO) in December 2001, China has been making steady progress in meeting its WTO commitments, and with a vast supply of cheap labour, the country remains the top destination for foreign direct investment in the developing world. Meanwhile, the Chinese government is increasingly giving more protection and encouragement to the burgeoning private sector, which is now the most dynamic part of the economy and accounts for most of the country's job growth. Having said this, foreign companies continue to complain about the poor protection of intellectual property in China, and the command nature of China's economy means that bureaucracy remains a key obstacle to doing business in the country.

Content

Executive Summary
- Slowing Growth To Bring Rising Political Risk
- SWOT Analysis
- BMI Political Risk Ratings
Chapter 1: Political Outlook
- Domestic Politics
- Risk Of Social Unrest Continues To Simmer
- Rapidly slowing economic growth could pose a significant challenge to political stability in China in 2009.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Q408 GDP Data Confirm Our Fears
- Economic growth dipped to a seven-year low of 6.8% in Q408, dragging full-year growth for 2008 to 9.0% - a
- sharp decline from the 13.0% recorded in 2007 and the first time since 2002 that the world's third-largest economy
- had failed to register double-digit headline growth.
- Fiscal Policy
- Fiscal Shortfall To Widen Sharply In 2009
- China's fiscal balance swung sharply into deficit in December 2008 as Beijing ramped up spending in the final weeks of
- the year in an attempt to counter the ongoing economic slowdown.
- Exchange Rate Policy
- CNY: Yuan To Fall By 1% In 2009
- In view of rapidly deteriorating growth prospects in China, we expect the yuan to remain within the CNY6.8000-6.9000/
- US$ range, as the People's Bank of China (PBoC) ensures the unit remains range-bound in order to promote price stability
- and bolster the all-important export sector.
- Balance Of Payments
- Balance Of Payments Position To Remain Secure
- China's current account will suffer at the hands of the global recession, with the country's overall trade balance shrinking
- from an estimated 9.5% of GDP in 2008 to 8.3% in 2009.
Chapter 3: 10-Year Forecast
- The Chinese Economy In 2018
- Policy Missteps Pose Key Threat To Positive Long-Term Outlook
- Upon recovering from the current global downturn, we expect China to return to its previous strong growth path, albeit at
- a more sustainable level of around 7-8%.
Chapter 4: Special Report
- China
- A Seismic Upheaval In 2009?
- One of the biggest - and least discussed - 'wild cards' that could rear its head in 2009 is dramatic political upheaval in China.
- United States
- Europe
- Big Trouble For European Banks In 2009
- The deteriorating global macroeconomic outlook, high levels of leverage, and a broken business model will combine to spell
- trouble for the financial services sector in 2009.
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Telecommunications
- Defence & Security
Chapter 7: BMI Global Assumptions
- Global
- Economic Activity
- Monetary Policy
- Commodities
List of Tables
- Table: China Political Overview
- Table: ECONOMIC ACTIVITY
- Table: FISCAL POLICY
- Table: CHINA Long -Term Macroeconomic Forecasts
- Table: Banks' Leverage Ratios
- Table: Assets As % of Home Country GDP
- Table: Assets As % of Home Country GDP When Eurozone Is Considered 'Home Country'
- Table: Exposure As % of Tot al Exposure To Region
- Table: Banks' Foreign Exposure (US$ mn)
- Table: Exposure As % of Nation al GDP
- Table: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Table: BM I LE GAL FRAME WORK RATINGS
- Table: LABOUR FORCE QUALITY
- Table: Asia, FDI Annual Inflows
- Table: BMI TRADE RATINGS
- Table: CHINA TOP EXPORT DESTINATIONS
- Table: Chin a Telecoms Sector - Internet - Historical Data & Forecasts
- Table: Chin a Telecoms Sector - Fixed-Line - Historical Data & Forecasts
- Table: China's Military Personnel, 2004-2013 ('000)
- Table: Global Assumptions
- Table: GLOBAL AND RE GIONAL REAL GDP GROWTH, % chg y-o-y
- Table: Developed States, Real GDP Growth Forecasts
- Table: Emerging Markets, Real GDP Growth Forecasts
- Table: DEVELOPED MARKET EXCHANGE RATES
- Table: EMERGING MARKET EXCHANGE RATES