Preparing For China

Although China has yet to be affected as substantially as many of the other economies in Asia by the U.S. Financial Crisis, that is not to say that it is immune or that the affects will not be substantial.  China has been to this point an extremely large net exporter of savings, with the world’s largest foreign reserves of $1.8 trillion dollars.  Much of this has been placed in U.S. Treasuries and other assets.  The financial system in China is still flush with cash, which China will need to place in use in the months ahead.  No promises have been made that this will be invested overseas but U.S. Treasuries and other U.S. investments look less risky and more stable than some other investments suggested to this point.

With the U.S. and the EU accounting for about 40 percent of China’s total exports, the country’s exports will decrease as the U.S. and EU economies weaken. This is already starting to happen with China’s third-quarter gross domestic product growth turning in a growth figure that was less than projected at 9.0 percent compared to second-quarter growth of 10.1 percent, the National Bureau of Statistics reported Oct. 20, according to the Financial Times. Retail sales and fixed-asset investment growth accelerated in September, while industrial production fell to its lowest growth level in six years. Consumer inflation was 4.6 year-on-year in September, the same figure as August and significantly down from 8.7 percent in February.

To boost China’s growth prospects and also as part of a coordinated worldwide effort of central bankers, the People’s Bank of China on October 8 cut the interest rate by 0.27 percentage points and the reserve requirement ration by 0.5 percentage points.  Additionally, the State Council abolished the 5 percent individual income tax on savings interest earnings on October 9.  Further, the government is expected to further ease monetary policy and stimulate the economy in the form of a tax cut and extra government spending.

According to Peng Wensheng, head of China Research of Barclays in a report to the People’s Daily “We are expecting the central bank to take another two rate cuts of 0.27 percentage points each over the next six months.

A slight slowdown in the gross domestic product growth figure will actually be welcomed by the government in terms of being a force to further slow inflation but the operative adjective here is that this change remain not too large. The Chinese government is already moving to ensure this.  According to the Ministry of Finance website on October 21, China’s government will raise export rebates on textiles, toys and furniture to 14 percent, effective Nov. 1.  These rebates had been largely abolished over the last two years and so this turn around in policy shows that the government is moving quickly to ensure that the fall in exports doesn’t get out of hand. 

 Furthermore, China continues to monitor developments and has demonstrated that it will actively engage with Washington and Europe as needed to help calm markets and to put a united face on global efforts to foster stability.

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