China Business Forecast Report Q3 2008

Publication Date	June 2008
Publisher	Business Monitor
Product Type	Report
Pages	63
ISBN Number	1744-8778
Product Code	BMI01197

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Summary

Challenges Mounting For The Government While China's economic momentum decelerated for the third consecutive quarter in Q108, there is evidence to suggest that the sharp slowdown from Q 07's 11. % year-on-year (y-o-y) expansion was in part a result of the winter snowstorms and the Lunar New Year celebrations, and that economic activity will remain robust in Q 08. Indeed, despite February's severe winter weather costing the Chinese economy more than US$1 bn, according to government estimates, industrial output grew 15.4% y-o-y, while fixed asset investment expanded by 24.3% and real estate investment grew 32.9%. With March data revealing that industrial output growth rebounded to 17.8% and fixed asset investment to .9% (on a year to date average basis), it seems that following February's downturn, domestic activity could now be set to return to Q 07's heady levels in Q 08.

Pressure on the Chinese government continues to grow as the build-up to the Olympics, inflation, the country's exchange rate policy and even natural disasters draw increasing criticism. While we see little immediate risk to political stability in China, the growing dissatisfaction nonetheless warrants careful attention. Meanwhile, on the foreign policy front, President Hu Jintao's visit to Japan on May 6-10 bodes well for warmer relations between Asia's two main powers, which are increasingly bound together by business and trade. However, both sides will continue to view each other warily in geopolitical terms, over matters such as their respective military postures, gas deposits in the East China Sea, and Taiwan.

Rampant food price inflation (which came in at 22.1% y-o-y in April) continues to heap pressure on China's monetary authorities, and will likely ensure that CPI inflation persists at or around current levels over the coming months, despite suggestions from the government that food prices have shown a slight dip in May. Indeed, with this being the case, we have decided to revise up our 008 average inflation forecast from 5.4% to 7.8%. We continue to expect further yuan appreciation going forward, as well as restrictions on bank lending and reserve requirement ratio hikes, and see scope for further direct controls on prices, but caution that these are unlikely to be enough.

While a vast supply of cheap labour and rapid economic growth ensures that China remains the top destination for foreign direct investment (FDI) in the developing world, there still remains a number of crucial impediments for foreigners wishing to do business within the country. These shortcomings are underscored by our business environment ratings, which reveal that bureaucracy and legal framework are the biggest drag on China's overall score of 52.5, while the country also remains uncompetitive with regards to its tax environment. While reforms are ongoing, we still expect meaningful progress to remain gradual.

Content

Executive Summary
- Challenges Mounting for The Government
Chapter 1: Political Outlook
- SWOT Analysis
- Bmi Political Risk Ratings
- Domestic Politics
- Political Pressure Continues to Build on Government
- Pressure on The Chinese Government Continues to Grow as The Build up to The Olympics, Inflation, The Country's
- Exchange Rate Policy and Even Natural Disasters Draw Increasing Criticism
List of Tables
- Table: China Political Overview
- Foreign Policy
- Beijing-Tokyo: Smoother Ties, but Obstacles Remain
- Chinese President Hu Jintao's Visit to Japan on May 6-10 Bodes Well for Warmer Relations between Asia's Two
- Main Powers, Which Are Increasingly Bound Together by Business and Trade
Chapter 2: Economic Outlook
- SWOT Analysis
- Bmi Economic Risk Ratings
- Economic Activity
- Is Q108 Growth Really A Telling Indicator?
- Having Slowed for The Third Consecutive Quarter in Q108, We Are Anticipating Economic Activity to Once Again
- Accelerate in The Second Quarter of The Year as The Economy Shakes off The Ill Effects of February's Snow Storms
List of Tables
- Table: Economic Activity
- Monetary Policy
- Inflationary Headache Continues to Build
- China's Inflationary Headache Continues to Build as Consumer and Producer Prices Soar
List of Tables
- Table: Monetary Policy
- Exchange Rate Policy
- Will 9% Appreciation in 2008 Be Enough?
- We Are Forecasting The Yuan to Rise by 9.0% against The Dollar in 2008, but Growing Domestic Imbalances -
- Largely as A Result of The Country's Undervalued Currency - Have Prompted Speculation That A One-off Revaluation
- May Be in The Offing
List of Tables
- Table: Exchange Rate Policy
- Regional Policy
- Xinjiang: Far from Quiet on The Western Front
- since The China Western Development Policy Was Introduced by The State Council in January 2000, The Sparsely
- Populated Xinjiang Uighur Autonomous Region (Commonly Referred to as Xinjiang) in The Far Northwest of The
- Country Has Risen in Prominence
Chapter 3: Special Report
- Business Outlook for Global Frontier Markets
- Growing Fast on The New Frontier
- The 41 States That Bmi Examines in A New Report on Our Online Service May Make up Only A Small Slice of The
- World Economy, but They Possess Characteristics That Will See Them Gain Importance in The Eyes of Investors and
- Global Businesses over The Coming Years
List of Tables
- Table: Frontier Markets - Key Data and Projections for Top 10 Countries
- Frontier Investment
- Potential and Pitfalls
- The Spectacular Macroeconomic Performance of Frontier Markets in Recent Years Has Been Matched by Mildly
- Successful Efforts to Deepen Capital Markets
List of Tables
- Table: Gdp per Capita, US$ (in Order of % Increase)
- Table: Diversity through Frontier Markets - Correlation Coefficients January 2004-April 2008
- Table: Frontier Market Indices
- Regional Overview
- from Hidden Dragons to Final Frontiers
- Laos
- Neighbouring Economies The Key to Growth
- Laos's Gdp Growth Has Been Boosted in Recent Years as Neighbours China, Thailand and Vietnam Compete
- for Its Natural Resources
List of Tables
- Table: Yemen Economic Activity
- Yemen
- Huge Potential, but Don't Bank on Gcc Membership
- Markets Do Not Come Much More Frontier than Yemen, and, as Would Be Expected, There Is Huge Potential
- for Development, with The Prospect of Eventual Gcc Membership Likely to Act A Key Investment Pull
List of Tables
- Table: Democratic Republic of The Congo - Economic Activity
- Democratic Republic of The Congo
- Mining Industry to Drive Growth
- The Democratic Republic of The Congo's Mining Industry Will Be A Key Driver of Growth and Is Likely to Attract
- Significant Levels of Fdi, with Our Real Gdp Forecasts Standing at 8.3% and 7.9% in 2008 and 2009, Respectively
- Cuba
- Investment Prospects after Fidel
- The Accession of A New Leadership Structure in Cuba Has Sparked Excitement That The 45-Year-Old Trade
- Embargo with The US May Be Lifted and Cuba May Move toward Market Liberalisation
List of Tables
- Table: Cuba Macroeconomic Data and Forecasts
- Mongolia
- Minerals to Drive Economic Boom
- Mongolia Is in The Midst of A Massive Resource-LED Economic Boom That Should Lift Gdp Growth into The
- Double Digits and Underpin Robust Increases in Exports and Inflows of Foreign Investment Capital over The
- Long Term
List of Tables
- Table: Mongolia - Economic Activity
Chapter 4: Business Environment
- SWOT Analysis
- Bmi Business Environment Risk Ratings
- Business Environment Outlook
List of Tables
- Table: Bmi Business and Operational Risk Ratings
- Institutions
List of Tables
- Table: Bmi Legal Framework Ratings
- Infrastructure
- Market Orientation
List of Tables
- Table: Asia, Fdi Inflows
- Table: Top Export Destinations
- Table: Bmi Trade Ratings
- Operational Risk
Chapter 5: Key Sectors
- Autos
List of Tables
- Table: China Autos Sector - Historical Data and Forecasts
- Petrochemicals
List of Tables
- Table: Chinese Petrochemicals Sector Historical Data & Forecasts