Overview

China’s domestic demand is slowing down. GDP growth remains high due to a large contribution of external trade as exports continued to power ahead while imports decelerated significantly. Net of external demand, the GDP numbers suggest that a slowdown in domestic demand is under way. Slower credit and profit growth, lower FDI and modest growth in machinery and equipment imports are pointing to a further slowdown in investment to a more sustainable pace in the period ahead. Signals are that the government’s measures to slow the real estate sector are also starting to work.

The debate on the direction of the economy and the desired stance of economic policy is to some extend clouded by headline monthly activity indicators. Continued overheating, a soft landing, and the risks of deflation are all subject of recent debate. Indeed, growth in fixed asset investment and retail sales do not signal much of a slowdown. However, these numbers tend to overstate growth in investment and consumption, which are likely to have grown significantly less rapidly.

The change in the exchange rate system and the accompanying revaluation may further slow domestic demand. The impact on the trade balance is likely to be limited, but some of the capital flows associated with an expected revaluation could moderate in the months ahead, and therefore give the authorities more independence in conducting monetary policy. Development of forward markets to allow for hedging of trade and investment related capital flows is now a priority, as is close monitoring of short-term capital flows and exposure of domestic institutions to foreign exchange rate risk. Over time, more clarity on how the authorities will use their increased autonomy in monetary policy will become desirable.

China’s macroeconomic outlook remains favorable with some softening of growth expected this year and some more in 2006. Risks have become more balanced. Downward risks include lower than expected export demand. A two-way risk is formed by the considerable uncertainty on the extent to which domestic demand, notably investment, is slowing.

While macroeconomic policymakers should remain alert to the possibility that risks materialize, for now the focus could be more on the structural issue of rebalancing growth. The rebalancing would be away from the relatively volatile export and investment-based growth to more stable consumption-based growth. Measures in social security and shifting government spending away from investment towards health, education, and social safety could help increase consumption’s share in GDP, policies that would also help in redressing the surpluses on the current account. To maintain growth and employment creation as consumption increases, however, more efficient investment as well as a shift of investment to services is needed. Financial sector reforms, better corporate governance, and a dividend policy for state enterprises could be measures towards that goal.

 Read the full report:  China Quarterly Update - August 2006 (209kb pdf)
  Read the full report:  China Quarterly Update - May 2006 (168kb pdf)
 Read the full report:  China Quarterly Update - February 2006 (189kb pdf)
 Read the full report:  China Quarterly Update - November 2005 (176kb pdf)
 Read the full report:  China Quarterly Update - August 2005 (122kb pdf)

Source: http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/CHINAEXTN/0,,contentMDK:20652127~pagePK:141137~piPK:141127~theSitePK:318950,00.html

Two hundred and twenty of the top 500 manufacturing companies in China are state-owned, said the National Bureau of Statistics (NBS) on Saturday.
More than 75 percent of the top 500 are located in east China, with the highest number in Jiangsu province.
Five of the top ten manufacturing companies are in the steel sector and two in the automobile sector. Legend Holdings Ltd. and Haier Group Corporation are two electronic companies in the top ten list and their annual sales revenues last year both topped 100 billion yuan.
The other three companies with sales revenues of over 100 billion yuan last year are BaoSteel, China First Automobile Group and Dongfeng Motor Co., Ltd..
The 500 companies are selected according to their sales revenues in 2005, NBS said. (1 U.S. dollar=7.97 yuan)
Source: Xinhua  20 August 2006  http://english.people.com.cn/200608/20/eng20060820_295009.html

China is to start construction of its largest dimethyl ether (DME) project with an annual output of three million tons to reduce rising oil consumption.
Coal-based DME is a clean-burning alternative to liquefied petroleum gas, liquid natural gas, diesel and gasoline.
Located in Ordos city of north China’s energy-rich Inner Mongolia Autonomous Region, the project will cost 21 billion yuan (2.6 billion U.S. dollars), the Shanghai Securities News reports.
Compared with the current annual output of 120,000 tons of DME each year, the project will make a huge difference to China’s alternative energy sector, said a statement from the National Development and Reform Commission (NDRC).
A pipeline will be built to transfer the DME from Ordos to the port city of Tangshan in north China’s Hebei Province. This would then enable it to be shipped to provinces in east and south China which are crying out for energy sources.
The participants in the project include power giants China National Coal Group Corporation, China Petroleum and Chemical Corporation and the Shanghai-based Shenergy Group.
Facing oil shortages, China is speeding up efforts to develop an oil substitution program to reduce its reliance on oil imports and offset the effects of rising oil prices.
But as a sustained coal supply has remained a challenge for China, NDRC has banned any coal-based DME project with a design capacity lower than one million tons.
Source: Xinhua  18 August 2006   http://english.people.com.cn/200608/18/eng20060818_294272.html

Opposition from the Ministry of Commerce as well as eastern provinces has derailed plans to enact a law equalizing income tax rates for both domestic and foreign companies. Companies with foreign investors have enjoyed an income tax rate of 15 percent since 1991, while domestic businesses are required to pay nearly 25 percent of their income.

PERFORMANCE / GRANT THORNTON POLL

Costs, position affect competitive outlook
PLOY CHITSOMBOON
Thai business owners should focus on cutting costs and setting clear market positions to cope with the boom in China, according to a survey by Grant Thornton, a leading consulting firm.
Peter Walker, the company’s partner in Bangkok, said the Thai economic outlook remained positive on the back of robust growth in tourism and exports. Yet, shortfalls in certain areas need to be resolved.
‘’Thai businessmen largely focused on cost-cutting measures while some opted for revenue boosting,'’ he said.
The International Business Owners Survey 2006 found that the biggest concerns among business people around the world were rising oil prices and raw material costs, which led to shrinking profits.
The survey is conducted annually to examine attitudes, plans and trends of over 7,000 businesses in 30 countries. Thailand was included in the survey for the first time this year, with 150 business owners interviewed.
This year, the issues covered were business expectations, business constraints, international trade, the market in China, business owners’ mindsets, risk management and skills.
The survey showed that 9% of the respondents expressed confidence in the positive outlook of the Thai economy, compared with 64% in Singapore, 36% in Malaysia and 93% in India, the highest. Taiwan had a strong negative business expectation of -19%, according to Mr Walker.
‘’Business owners in Thailand are quite optimistic on the Thai economic outlook, but the level is considered much lower if you compare it with others in the same region,'’ he said.
The survey also showed that 38% of respondents believed political issues were one of the key negative impacts on the Thai economy, followed by oil prices (22%) and tourism crises (14%).
Thirty-seven percent of the Thai firms surveyed are involved in exports, one of the main economic drivers. The proportion is comparable with the average worldwide (36%) and in Asia (32%).
Hindrances for Thai businesses included barriers to international expansion which were undermined by political uncertainties (17%) and financial constraints (17%).
‘’The key issue here is that Thai financial institutions are unwilling to lend money, particularly working capital, for international expansion to Thai businesses,'’ he explained.
Furthermore, 45% of the survey respondents said that China’s rapid growth had a negative impact on their businesses, only 5% said they were affected positively.
Worse, 90% of Thai SMEs said they had no plans to export to China and had no risk-management plans to cope with the rapid changes brought on by China’s rise as an exporter worldwide.