Population 1353.821 million
GDP 8250.241 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
10.4 |
9.2 |
7.7 |
8.5 |
|
Inflation (yearly average) (%)
|
3.3 |
5.4 |
3 |
3 |
|
Budget balance (% GDP)
|
-1.5 |
-1.2 |
-1.3 |
-1 |
|
Current account balance (% GDP)
|
4 |
2.8 |
2.3 |
2.5 |
|
Public debt (% GDP)
|
33.5 |
25.8 |
22.2 |
19.6 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- External accounts benefitting from competitiveness and industrial diversification
- Limited risk of external indebtedness thanks to high level of foreign exchange reserves and a current account surplus
- Sovereign risk contained: public debt is mainly domestic and denominated in local currency
- Gradual move up-market
- Infrastructure development favoured by the stimulus package
- High corporate savings rate financing the bulk of investments
WEAKNESSES
- Social tensions linked to rising inequality
- Share of consumption in GDP remains weak: rebalancing China’s growth model remains a medium term challenge
- Aging population and pool of abundant cheap labour gradually drying up
- Overcapacity in industry and trade
- Weak China’s banks, considering the credit dynamism and uncertainties concerning level of non-performing loans
- Environmental problems
Risk assessment
Growth to rebound in 2013
After continuing to slow until Q3 2012, activity rebounded in the fourth quarter. The main leading indicators (business confidence, industrial production, electricity production, retail sales) point to a continuation of this trend in the first half of 2013.
Exports, especially to the euro zone (15% of total sales) had previously, contracted, impacting particularly the textile and electronics sectors. Furthermore, domestic demand had stalled due to contraction in the property sector: with this sector representing 9% of GDP, fewer transactions and falling prices affected activity in 2012. These difficulties had consequences for the metal and cement sectors. But property prices and investment in the sector stabilised in the second half of 2012.
This stabilisation and the pick-up in growth was due to targeted stimulus measures: Construction of 36 million social housing units over five years, tax exemptions for exporting businesses, scrappage premium in the automobile sector, subsidies for housing first time-buyers, the announcement of investment plans by several local authorities. Moreover, the yuan remained practically stable against the dollar in 2012, while it had appreciated by 5% in 2011. On the monetary side, it seems the banks were instructed to grant more credit in 2012. We observe, however, that credit grew much less than was observed in 2009, that it mainly concerns short-term funding and that it mainly benefits large state-owned enterprises.
The effect of the accommodative policy on activity will still be visible in 2013. Besides the stabilisation of the property sector, private consumption will still be very dynamic: Household incomes are growing strongly, inflation is expected to remain contained and more and more local authorities are carrying out further social transfers, which should reduce precautionary saving. In this context, the sectors linked to household consumption, such as cars, will remain dynamic.
Weaknesses persist at the level of SMEs, the banks and local authorities
SMEs faced several shocks in 2012, notably substantial wage pressures and problems of access to finance. They are increasingly turning to the informal credit system, which applies usurious rates. In a context of sluggish external demand, these SMEs, which account for 68% of exports, could quickly find themselves in difficulty.
Moreover, the banking sector could be affected by the growing difficulties of the property sector, despite the encouraging results of stress tests on the biggest commercial banks. Banks could, in particular, suffer from the growing difficulties of local authorities, whose debt amounts to 27% of GDP. The risk of a string of defaults is likely to be avoided thanks to the intervention of the State, which put in place conditions for refinancing this debt in 2012. The banks are being encouraged to extend the maturity of the loans they have granted, while local authorities are now allowed to issue bonds. However, this does not exclude the risk of occasional defaults by local authorities or second tier banks. The State, seeking to avoid the risk of moral hazard, could be tempted to make some isolated examples.
Shortcomings in the business environment
The political transition is being made with the emphasis on continuity: Xi Jinping and Li Keqiang, who will be President and Prime Minister respectively from March 2013, will adhere to the line of their predecessors. They must, however, take account of social tensions, which remain strong, particularly due to the recurrent confiscations of agricultural land for the benefit of property developers and inequalities between the countryside and the towns. Though declining, urban household incomes are 2.8 times more than that of a rural household. In addition, relations between China and Japan have deteriorated since September 2012 after the Japanese government’s decision to buy out the Senkaku-Diaoyutai islands from their private owner. These tensions over the sovereignty of archipelagos in the South China Sea are not isolated, as is shown by the recurrent conflicts concerning the Paracels and Spartleys islands between China, Vietnam, Indonesia and the Philippines. Despite this rise in tension, an armed conflict in the region remains unlikely at this stage.
Finally, major governance shortcomings persist, especially with regard to access to companies’ balance sheets. The recent hardening of the conditions for obtaining financial information on businesses continues to be a key concern.
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