China Business Forecast Report Q3 2009

Publication Date	May 2009
Publisher	Business Monitor
Product Type	Report
Pages	70
ISBN Number	1744-8778
Product Code	BMI03902

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Summary

2009 Growth Set To Be 20-Year Low

With fixed asset investment and industrial production growth both accelerating in March, and the China Federation of Logistics and Purchasing 'official purchasing managers' index climbing back above the key 50.0 level, there is renewed optimism that the 6.1% real GDP growth recorded in Q109 may mark be the bottom of China's current downturn. However, although Beijing's recordbreaking fiscal stimulus package will continue to buoy headline growth, we remain sceptical that it will be able to sufficiently compensate for anticipated further weakness in exports and private consumption. As such, we retain our full-year growth forecast for 2009 of 5.6%.

The intensification of the long-running dispute over the Spratly Islands in the South China Sea witnessed in March has underscored the sensitivity surrounding the issue of the islands' sovereignty.

However, although the issue is unlikely to be resolved any time soon, we do not expect the recent rise in tensions in the area to escalate much further. We believe that China's recent actions in the South China Sea are merely an attempt to affirm its position as a regional powerhouse and remind other players of its growing might, rather than part of any broader strategy to assert its military power over the region.

Despite rapidly cooling economic growth and annual consumer price inflation having followed producer price growth into negative territory, it appears that the central bank's aggressive monetary easing has now shifted in favour of a more neutral stance. However, we believe that despite the central bank's reservations, a weakening economic climate will likely force it into easing monetary policy more aggressively than its current rhetoric suggests. Therefore, we retain our forecast for 108bps worth of interest cuts by year-end. Meanwhile, although financial markets have once again begun to price in yuan appreciation, we retain our view that the Chinese currency will remain rangebound between CNY6.8000-6.9000/US$ over the foreseeable future.

A study by the American Chamber of Commerce in Shanghai and consultants Booz & Co has revealed that China is becoming more attractive for foreign direct investment (FDI) due to its comparatively strong growth prospects. The study also showed the number of companies that had previously expressed concerns about China losing its competitive edge to other low-cost countries fell by over 50% from last year's survey. However, the Ministry of Commerce revealed that FDI in the first quarter of 2009 fell by 20.6% y-o-y to US$21.8bn, with FDI inflows falling by 32.6% y-o-y, 15.8% and 9.5% in January, February and March respectively.

Content

Executive Summary
- 2009 Growth Set To Be 20-Year Low
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Foreign Policy
- South China Sea Dispute: What Are The Implications?
- We believe that China's recent actions in the South China Sea are merely a case of Beijing flexing its muscles in
- an attempt to affirm its position as a regional powerhouse and remind other players of its growing might, rather
- than part of any broader strategy to assert its military power over the region.
- Domestic Politics
- Tibet Anniversary Suggests Further Unrest Lies Ahead
- Although the 50th anniversary of Tibet's failed uprising against Beijing passed by with little incident on March 10,
- the increased security measures taken by Beijing underscored the ongoing risk of unrest in the region.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Has The Slowdown Found A Bottom?
- With fixed asset investment and industrial production growth both accelerating in March, and the official
- purchasing managers' index climbing back above the key 50.0 level, there is renewed optimism that the 6.1%
- real GDP growth recorded in Q109 may mark the bottom of China's current downturn.
- Monetary Policy
- Aggressive Monetary Easing To Take A Pause
- Despite rapidly cooling economic growth and annual consumer price inflation poised to follow producer price
- growth into negative territory, it appears that the central bank's aggressive monetary easing has now shifted in
- favour of a more neutral stance.
- Exchange Rate Policy
- Still Not Expecting Yuan Appreciation
- Although financial markets have once again begun to price in yuan appreciation, we retain our view that the
- Chinese currency will remain rangebound between CNY6.8000-6.9000/US$ over the foreseeable future as
- Beijing maintains its current exchange rate policy against an uncertain economic backdrop.
- Fiscal Policy
- Challenges Await For Ground-Breaking Healthcare Reforms
- Given that the absence of an adequate social safety net is often cited as one of the key factors for China's high
- savings rate, the announcement of a significant overhaul of the healthcare system marks a significant
- development for the Chinese economy.
- Property Sector Outlook
- Property Sector Not Out Of The Woods Just Yet
- Real estate investment grew by 4.1% y-o-y in Q109, according to the National Bureau of Statistics (NBS),
- suggesting that March witnessed a significant upturn in capital spending in the sector after property investment
- in urban areas grew by just 1.0% y-o-y in the January-February period.
- Regional Policy
- Guangdong: China's Leading Light At Risk Of Fading
- The triumph of Guangdong's export-driven economic growth model - which has generated average real growth of
- around 14% over the past 30 years - had seen the province emerge as a beacon of success in China, even within
- the context of the country's extraordinary economic ascent.
Chapter 3: 10-Year Forecast
- The Chinese Economy To 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
- The Outlook For Global Banking
- Global Overview: Changes Are Coming
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Freight Transport
- Executive Summary
- BMI has given China's freight industry a rating of 63.7 (out of a theoretical maximum of 100), which places
- it right up at the top of the Asia Pacific region.
- Chemicals
- Executive Summary
- In 2008, China's chemicals industry was worth US$205.2bn, representing growth of 5%. By 2013, we
- expect the market to reach a value of US$242bn.
Chapter 7: BMI Global Assumptions
- Global Outlook
List of Tables
- Table: China Political Overview
- Table: ECONOMIC ACTIVITY
- Table: MONETARY POLICY
- Table: EXCHANGE RATE POLICY
- Table: FISCA L POLICY
- Table: Long-Term Macroeconomic Forecasts
- Table: LOAN-TO-DEPOSIT RATIOS, Selected States
- Table: LOAN GROWTH (% CHG Y-O-Y), Selected States
- Table: COMMERCIAL BANKING BUSINESS ENVIRONMENT RATINGS, selected states
- Table: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Table: BMI LEGAL FRAMEWORK RATINGS
- Table: Asia, FDI Annual Inflows
- Table: BMI TRADE RATINGS
- Table: TOP EXPORT DESTINATIONS
- Table: China's Freight Transport Industry, 2006-2013
- Table: China Chemicals Market Value, 2001-2012 (US$bn)
- Table: GLOBAL ASSUMPTIONS
- Table: GLOBAL ASSUMPTIONS - LONG-TERM FORECASTS
- Table: Developed States, Real GDP Growth Forecast
- Table: EMERGING MARKETS, REAL GDP GROWTH FORECAST
- Table: Commodities
- Table: GLOBAL & REGIONAL REAL GDP GROWTH