2013-02-22 13:41:41 - New Country Reports research report from Business Monitor International is now available from Fast Market Research
We estimate China's real GDP came in at 7.7% in 2012, marking the weakest growth outturn since 1990. Unlike the situation facing the economy in Q109, when a recovery in exports combined with a fiscal stimulus programme resulted in a V-shaped recovery, this time we expect the ongoing bounce in economic activity to fade in H213 as the country's structural headwinds build. As such, we are sticking with our 2013 growth forecast of 7.5%.
Inflation is beginning to rear its ugly head in China as a predictable consequence of the proliferation in shadow bank lending and the increasingly inefficient allocation of capital. While consumer price (CPI) inflation remains low by historical standards, it has risen sharply in recent months and
with the economic recovery gaining momentum, it appears that the only way is up over the coming months. Renewed economic weakness in H213 should cool CPI, however, and we are forecasting an average rate of 2.8%, with an end-2013 target of 2.6%. The main risk comes from further expansionary policies, which we believe could result in the emergence of stagflation.
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The rise of shadow banking activity poses systemic risks to China's financial system as a whole. Risks have been contained thus far thanks in part to explicit government support, and we expect this to remain the case. That said, the potential for a run on the shadow banks, triggering a widespread liquidity crisis, is as great as ever.
Sino-Japanese relations are likely to remain strained in 2013, and could worsen if new Japanese Prime Minister Shinzo Abe takes steps to boost the role of the military or downplay Japanese atrocities in Asia in the early 20th century. The biggest risk is that of an aerial or naval skirmish as a result of an 'incident' in the disputed Senkaku/ Diaoyu islands in the East China Sea.
Major Forecast Changes
We have upgraded our real GDP growth forecast for 2013 from 6.9% to 7.5% owing to the strong rebound in economic activity witnessed in late-2012/early-2013, although our outlook remains below consensus estimates of 8.1%.
We have also upgraded our inflation outlook, calling for consumer price inflation to average 2.8% this year (from a previous forecast of 2.6%) owing to the continued rise in shadow-bank lending.
Key Risks To Outlook
The main downside risk to our economic outlook remains another collapse in external demand, such as the one that occurred at the height of the global financial crisis. This would seriously undermine growth in trade-dependent industries and hasten a fall in the property market, potentially leading to an outright recession. There is also a risk that continued fiscal and monetary stimulus by government and the People's Bank of China could usher in stagflation.
The major political risk comes from a rise in social unrest and a surge in public demonstrations against government corruption, inflation and housing affordability, which could be triggered by overseas events or an economic slump. While we do not see the rule of the Communist Party of China (CPC) as being at risk, such events would still have a detrimental impact on the business environment and could see the CPC strengthen its grip on the economy to the detriment of growth.
Partial Table of Contents:
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
BMI Political Risk Ratings
New Leaders Facing Immediate Challenges
- China's new leadership, headed by Xi Jinping, has been successfully inaugurated, marking a reasonably smooth transition. However, the leadership faces immediate challenges as it takes the helm amid China's weakest economic performance in more than 20 years.
Sino-Japanese Relations: Outlook For 2013
- Sino-Japanese relations are likely to remain strained in 2013, and could worsen if new Japanese Prime Minister Shinzo Abe takes steps to boost the role of the military or downplay Japanese atrocities in Asia in the early 20th century. The biggest risk is that of an aerial or naval skirmish as a result of an 'incident' in the disputed Senkaku/Diaoyu islands in the East China Sea.
Major Challenges Over The Coming Decades
- China faces myriad economic, social and environmental challenges over the coming decades that could seriously test the Communist Party of China's ability to govern. The best-case scenario for any eventual political transition would entail an elite-led liberalisation of the authoritarian system, while the worst-case scenario would involve a violent change of regime.
Chapter 2: Economic Outlook
BMI Economic Risk Ratings
Is The Growth Boom Back On Track?
- Fears over China's shaky financial system, overvalued property market, and huge industrial overcapacity have been replaced by hopes that policymakers can engineer a recovery back above the 8% level. We maintain our view that the prospects for H113 look relatively bright. However, there may be some negative surprises in store as the year progresses as the recovery comes up against the country's structural hurdles. As such, we are forecasting real GDP growth of 7.5% in 2013, versus the Bloomberg consensus of 8.1%.
TABLE: CHINA - ECONOMIC ACTIVITY
Risks Still Lurking In The Shadows
Full Table of Contents is available at:
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