Government Aims for 7% Growth

CHINA - Report 25 Mar 2015 by FAN Gang and Chunyang Wang

Executive Summary

Prime Minister Keqiang Li announced in an address to Congress on March 4th that China was aiming for growth of about 7% for 2015. And he stated that more structural reform would be needed going forward.

The economy continued to slow in January and February. Industrial output was up 6.8% y/y in January-February, down 0.6 pps from Q4 -- its lowest growth since the index was established. Fixed asset investment was up 13.9% y/y, down 1.8 pps, its lowest growth rate since 2002. We believe government policies should be loosened, in order to reverse the slowdown.

Retail sales of consumer goods rose 10.7% y/y in nominal terms, down 1 pps from Q4. CPI rose 1.1% y/y, down 0.4 pps from last December. If the slowdown continues, CPI in June and July will be nearly zero. In February, the ex-factory price index of industrial products fell -4.8% y/y, and PPI fell -5.9% y/y, down significantly from last December.

Imports plunged -20.2% y/y, and exports rose 15%, up 6.5 pps from Q4. The export rally is debatable, though, since it confirms export delivery value. But the combination of the drop in imports and the rise in exports revives concerns that the trade surplus will again increase.

In February, M2 increased 12.5% y/y, and M1 increased 5.6% y/y. Hot money is flowing out of China in significant quantities. Foreign currency deposits moved from a large increase to a large decrease, falling by -108.3 billion yuan.

France, Italy and Germany have joined the UK in becoming members of the China-led Asian Infrastructure Investment Bank (AIIB). The purpose of the AIIB -- regarded as a rival to U.S.-dominated agencies -- will be to provide finance to infrastructure projects in the Asia-Pacific region. China has made other multilateral financing moves too, such as establishing the BRICS Development Bank, and a “New Silk-Road Fund” for investment in infrastructure that connects China and Central Asian nations. These initiatives demonstrate China’s determination to continue integrating into the global economy, and global markets. Such initiatives will certainly benefit the developing world; we expect them to generate win-win results.

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