LI & FUNG China Trade Quarterly

Transcription

1 LI & FUNG China Trade Quarterly Domestic and Foreign IN THIS ISSUE : Part One : Domestic Trade I. Recent development 2 II. Highlights 10 Snapshot: policy focuses Domestic Trade May 2012 Issue 26 Retail sales of consumer goods reached 6,492.2 billion yuan in January- April, up nominally by 14.7% yoy. Among commodities, sales of telecommunication equipment achieved the most impressive growth of 42.0% yoy in Jan-Apr, followed by building and decoration materials (25.4% yoy) and furniture (25.0% yoy). Rural household consumption maintained robust growth. The per capita cash expenditure on consumption of rural households registered growth of 13.3% yoy in real terms in 1Q12, much higher than the growth of the per capita cash expenditure on consumption of urban households (8.2% yoy). III. Outlook 15 Part Two : Foreign Trade I. Recent developments 18 II. Highights 25 III. Outlook 29 Inflation eased in April. On a mom basis, the CPI growth was -0.1% in April. The price index of the food component fell by 0.9% mom in April. China s central bank announced to cut the RRR by 50 bps, effective from 18 May. In view of the economic slowdown, we expected that the central bank will continue to inject liquidity into the market through RRR cuts and open market operations in the near future. China s Entrepreneur Confidence Index rebounded from the recent low of in 4Q11 to in 1Q12, indicating that Chinese entrepreneurs have turned more optimistic about the future prospects of their industries. Foreign Trade Both China s exports and imports showed decelerating growth. China s export growth decelerated from 14.3% yoy in 4Q11 to 7.6% yoy in 1Q12 and 4.9% yoy in April; Import growth declined markedly from 20.1% yoy in 4Q11 to 6.9% yoy in 1Q12 and 0.3% yoy in April. Growth of China s trade with its major trading partners slowed. In January-April, Sino-EU trade amounted to US$ billion, up slightly by 0.3% yoy; Sino-US trade registered weaker growth of 9.2% yoy to hit US$ billion; Sino-ASEAN trade increased by 6.7% yoy to reach US$ billion; Sino-Japan trade shrank by 1.5% yoy to US$ billion. Helen Chin, Timothy Cheung Tel: (852) helenchin@lf1937.com timothycheung@lf1937.com 10/F, LiFung Tower, 888 Cheung Sha Wan Road, Hong Kong Tel : (852) Fax : (852) lfdc@lf1937.com China s FDI has posted negative yoy growth for six consecutive months. In January-April, China s FDI declined by 2.4% yoy to US$ 37.9 billion. The negative growth was attributable to the growing concerns about a hard landing in China. The RMB/USD exchange rate has continued to fluctuate. The RMB appreciated by 0.4% against the US dollar in January-April. We expect the RMB to appreciate at a gentle pace against the USD for the rest of the year. Growth of the global merchandise trade decelerated in According to the WTO, the growth of the volume of the global merchandise trade decelerated from 13.8% yoy in 2010 to 5.0% yoy in The WTO further predicts that the growth will moderate to 3.7% yoy in

2 Li & Fung China Trade Quarterly May 2012 Issue 26 Part One: Domestic Trade I. Recent Development 1. Both domestic demand and export demand have continued to slow China s real GDP growth decelerated from 8.9% year-on-year (yoy) in 4Q11 to 8.1% yoy in 1Q12, weaker than market expectation. (The median forecast of 41 economists surveyed by Bloomberg News had called for 8.4% yoy growth.) Overall, China s nominal GDP amounted to 10.8 trillion yuan in 1Q12. (See exhibit 1) The real growth of the value added of all three types of industries decelerated in 1Q12, compared to FY11. The real growth rate of the value added of the secondary industry, which contributed 47.6% of China s nominal GDP in 1Q12, was 9.1% yoy in 1Q12, compared to the 10.6% yoy growth recorded in FY11. Meanwhile, the real growth rate of the tertiary industry, which contributed 45.9% of the country s nominal GDP, was 7.5% yoy in 1Q12, down from the growth of 8.9% yoy in FY11; and the real growth rate of the primary industry, which contributed 6.4% of the country s nominal GDP, went down to 3.8% yoy in 1Q12, compared to the 4.5% yoy growth recorded in FY11. Both domestic demand and export demand have continued to slow, as shown by some major indicators. For example, the growth of China s retail sales of consumer goods fell to 14.8% yoy in 1Q12 and 14.1% yoy in April, after staying high at around % yoy throughout October to December Meanwhile, the growth of China s nominal fixed asset investment (FAI) (excluding rural households) dropped to 20.2% yoy in January to April 2012, compared to the 23.8% yoy growth in FY11. Besides, China s export growth decelerated from 14.3% yoy in 4Q11 to 7.6% yoy in 1Q12 and 4.9% yoy in April. We expect the Chinese economic growth to decelerate further in coming months, amid the weakening demand. In our view, the slower-than-expected growth of China s exports, imports and industrial output in April increases the likelihood of further monetary easing. On 12 May, China s central bank announced to cut the banks reserve requirement ratio (RRR) by 50 bps effective from 18 May, which will free up more funds for banks to lend. It is widely expected that the central bank will take further action to inject liquidity into the market in the near future. Moreover, it is likely that the Chinese government will increase its fiscal expenditure and accelerate the construction of public housing, in a bid to support economic growth. Exhibit 1: China s real GDP growth, 2Q11-1Q12 FY11 9.2% 2Q11 9.5% 3Q11 9.1% 4Q11 8.9% 1Q12 8.1% Source: National Bureau of Statistics, PRC 2

3 Domestic and Foreign 2. Nominal growth of retail sales of consumer goods softened in January to April Retail sales of consumer goods showed a slight deceleration in growth in January to April According to the National Bureau of Statistics (NBS), China s total retail sales of consumer goods rose nominally by 14.7% yoy to reach 6,492.2 billion yuan in January to April The real growth in retail sales was 10.9% yoy in January to April By month, the retail sales grew nominally by 14.7% yoy in January to February 2012, 15.2% yoy in March and 14.1% yoy in April. In general, the growth pace was slower than that in FY11. Exhibit 2: China s total retail sales of consumer goods, May Apr 2012 May Jun 17.7 Jul 17.2 Aug 17.0 Sep 17.7 Oct 17.2 Nov 17.3 Dec 18.1 Jan-Feb Mar 15.2 Apr 14.1 Source: National Bureau of Statistics, PRC On a seasonally-adjusted basis, the month-on-month (mom) growth of the retail sales registered 0.91%, 1.32%, 1.19% and 1.13% in January, February, March and April respectively. (See exhibit 3) Exhibit 3: Mom growth of China s total retail sales of consumer goods, Nov Apr 2012 mom growth(%), seasonally adjusted* nov 11 Dec Jan 12 Feb Mar Apr Total retail sales * The seasonally adjusted figures were released by the NBS. Source: National Bureau of Statistics, PRC The urban retail sales increased nominally by 14.7% yoy to 5,624.2 billion yuan in January to April 2012; the rural retail sales rose by 14.6% yoy to billion yuan. By mode of sales, the retail sales of commodities reached 5,780.6 billion yuan, up nominally by 14.8% yoy in January to April 2012; the catering industry posted a sales growth of 13.3% yoy in nominal terms to reach billion yuan. 3

4 Li & Fung China Trade Quarterly May 2012 Issue 26 The retail sales of commodities of enterprises above the designated size 1 went up by 15.5% yoy to reach 2,810.9 billion yuan in January to April Among commodities, sales of telecommunication equipment achieved the most impressive growth of 42.0% yoy in January to April Due largely to the cooling down of the property market and the gradual withdrawal of government s subsidy program for home appliances in the rural market, housingrelated items saw slower sales growth than in FY11. The growth of sales of home appliances and video equipment witnessed significant deceleration from 21.6% yoy in FY11 to 2.4% yoy in January to April Meanwhile, sales of gold, silver, and jewelry also saw a significant drop of growth rate from 42.1% yoy in FY11 to 15.7% yoy in January to April Some market observers attributed the slowdown in growth to the recent fluctuations of gold and silver prices, as the uncertainty over the prices of gold and silver discouraged consumers from buying jewelry for investment purpose. Exhibit 5 demonstrates the nominal growth of China s retail sales of enterprises above the designated size by commodity. Exhibit 4: China s total retail sales of consumer goods, Apr 2012 yoy growth (%) FY11 1Q12 Apr Total retail sales Commodities of which: enterprises above the designated size Catering Source: National Bureau of Statistics, PRC Exhibit 5: China s retail sales of enterprises above the designated size by commodity, Apr 2012 yoy growth (%) FY11 1Q12 Apr Grain, oil, food, beverages, tobacco, and liquor Clothing, shoes, hats, and textiles Cosmetics Gold, silver, and jewelry Daily use products Sports and entertainment products Home appliances and video equipment Chinese and western medicine Stationeries and offices accessories Furniture Telecommunication equipment Petroleum and related products Automobiles Building and decoration materials Source: National Bureau of Statistics, PRC 1 Enterprises above the designated size refer to enterprises with annual sales of five million yuan or more and with an employee strength of 60 or more. 4

5 Domestic and Foreign 3. Consumers have become less optimistic recently After dropping to 97.0 in November, the lowest level since 2010, the consumer confidence index 2 showed increase throughout December to February. The index went up to in December 2011, and rose further to and in January 2012 and February respectively. Afterwards, it dropped markedly to in March, indicating that Chinese consumers have become less optimistic recently. (See exhibit 6). Exhibit 6: China's consumer confidence index, Apr Mar 2012 Apr May Jun Jul Aug Sep Oct Nov 97.0 Dec Jan Feb Mar Source: National Bureau of Statistics, PRC 4. Both rural and urban household income managed to maintain double-digit growth Amid the moderating Chinese economy, the nominal growth of per capita cash expenditure on consumption of rural households stayed robust at 17.5% yoy (or 13.3% yoy real) in 1Q12, indicating that the rural households greatly increased their consumption expenditures in early On the other hand, in 1Q12, the per capita cash expenditure on consumption of urban households was 4,320 yuan, up by 8.2% yoy in real terms. Both rural and urban household income managed to maintain double-digit growth in 1Q12. The per capita cash income of rural households increased by 17.1% yoy in nominal terms to 2,560 yuan, while the per capita disposable income of urban households grew nominally by 14.0% yoy to 6,796 yuan in 1Q12. We believe that the strong income growth was due largely to the limited supply of labour in China and the increase in prices of agricultural products. The real income growth of Chinese households was eroded by inflation. In comparison to the nominal growth rates, the real growth rates of both rural and urban household income were much lower in 1Q12, registering only 12.7% yoy and 9.8% yoy respectively. 2 A reading above 100 indicates that consumers tend to be optimistic; a reading below 100 indicates that consumers tend to be pessimistic. 5

6 Li & Fung China Trade Quarterly May 2012 Issue China s CPI growth moderated in April The yoy growth rate of China s consumer price index (CPI) 3 dropped from 4.5% yoy in January 2012 to 3.2% yoy in February, the lowest in twenty months, and then rebounded to 3.6% yoy in March. Afterwards, the CPI growth moderated to 3.4% yoy in April. (See exhibits 7 & 8) On a month-on-month basis, the CPI growth rose from the recent low of -0.1% in February to 0.2% in March, and fell again to -0.1% in April, driven by the fluctuations in food prices. The growth of the CPI of the food component rebounded from -0.3% mom in February to 0.2% mom in March, before declining to -0.9% mom in April. On the other hand, the growth of the CPI of the non-food component accelerated from 0.0% mom in February to 0.3% mom in April, indicating a modest increase in non-food prices. Looking ahead, we expect China s inflation to ease in the near term, owing to softening consumption demand. Besides, the government actions to cool the property sector and to increase the supply of public housing will continue to put downward pressure on housing prices, which would help alleviate the inflationary pressure. Upside risks, however, come mainly from the increase in wages and fuel prices, the adverse weather conditions, pass-through of upstream price pressures and the acceleration of the reform of resources pricing mechanisms. Exhibit 7: China s CPI growth, May Apr 2012 May % Jun 6.4% Jul 6.5% Aug 6.2% Sep 6.1% Oct 5.5% Nov 4.2% Dec 4.1% Jan % Feb 3.2% Mar 3.6% Apr 3.4% Source: National Bureau of Statistics, PRC Exhibit 8: China s CPI growth by commodity, Nov Apr 2012 yoy growth (%) Nov 11 Dec Jan 12 Feb Mar Apr Food Tobacco & liquor Clothing Household services, maintenance and renovation Medical healthcare and personal care Transportation and communication Recreational, educational products and services Housing Source: National Bureau of Statistics, PRC 3 The CPI, compiled by the National Bureau of Statistics of China, measures the price of a basket of goods and services that a typical household purchases. 6

7 Domestic and Foreign The yoy growth rate of China s producer price index of industrial products (PPI) 4 dropped all the way from 1.7% yoy in December to -0.7% yoy in April. On a mom basis, the PPI growth was 0.1%, 0.3% and 0.2% in February, March and April respectively, after posting negative growth in December and January. The figures indicate a rebound in exfactory prices of industrial products in the recent months. (See exhibits 9 & 10) Looking ahead, we expect China s PPI to post positive growth this year, particularly due to the increasing labour costs. Chinese manufacturers will continue to suffer from rising wages, owing to the limited labour supply and the upward adjustments in minimum wages. 5 In recent months, there have been reports on the resurgence of labour shortages in many provinces in China. Many enterprises thus have to offer higher salaries in a bid to hire or retain workers. Exhibit 9: China s PPI growth, May Apr 2012 May % Jun 7.1% Jul 7.5% Aug 7.3% Sep 6.5% Oct 5.0% Nov 2.7% Dec 1.7% Jan % Feb 0.0% Mar -0.3% Apr -0.7% Source: National Bureau of Statistics, PRC The yoy growth rate of the purchaser price index of industrial products 6 decelerated all the way from 3.5% yoy in December to -0.8% yoy in April. (See exhibits 10 & 11) On a mom basis, the growth of the purchaser price index rose from -0.4% in December to 0.1% in February, and then registered 0.1% and 0.0% in March and April respectively. Looking ahead, the future movements of the domestic prices of production inputs largely depend on the movements of global commodity prices, which could be seriously affected by any upsurge of the European debt crisis. 4 The PPI, compiled by the National Bureau of Statistics of China, measures the prices of industrial products when they are sold for the first time after production. 5 According to the 12th Five-year Plan, the minimum wage is targeted to increase by at least 13% per annum in 2011 to 2015, and local governments in many provinces are widely expected to raise the minimum wage levels in their jurisdictions this year. 6 The purchasing price index of raw material, fuel and power was renamed the purchaser price index of industrial products, effective from January The price index, compiled by the National Bureau of Statistics of China, measures the prices of production inputs such as raw materials, fuels and power purchased by industrial enterprises. 7

8 Li & Fung China Trade Quarterly May 2012 Issue 26 Exhibit 10: The purchaser price index of industrial products, May Apr 2012 (% yoy growth) May % Jun 10.5% Jul 11.0% Aug 10.6% Sep 10.0% Oct 8.0% Nov 5.1% Dec 3.5% Jan % Feb 1.0% Mar 0.1% Apr -0.8% Source: National Bureau of Statistics, PRC Exhibit 11: The purchaser price index of industrial products by selected commodity, Nov Apr 2012 yoy growth (%) Nov 11 Dec Jan 12 Feb Mar Apr Fuel & power Ferrous metals Non-ferrous metals Raw materials for the chemical industry Source: National Bureau of Statistics, PRC 6. Growth of industrial production dropped in January to April Amid the weakening demand, the growth of the value-added of industrial output (VAIO) in China dropped from 12.8% yoy in December to 11.6% yoy in 1Q12 and 9.3% yoy in April, the lowest since June Among different industries, the growth of VAIO of the heavy industry decelerated from 13.0% yoy in December to 11.0% yoy in 1Q12 and 8.9% yoy in April. The light industry fared better than the heavy industry. The growth of VAIO of the light industry rebounded slightly from 12.6% yoy in December to 13.2% yoy in 1Q12, but then fell to 10.3% yoy in April. (See exhibit 12) Looking ahead, we expect that the VAIO growth will be supported mainly by public housing and infrastructure construction by the government and the improvement in export demand, but constrained by the falling private property investment. 7 The National Bureau of Statistics has changed the method of compiling the value added of industrial output (VAIO), effective from January The statistical threshold for industrial enterprises has been raised to cover those with annual revenue of 20 million yuan or above, up from the previous threshold of 5 million yuan or above. 8

9 Domestic and Foreign Exhibit 12: China s industrial production growth, May Apr 2012 May % Jun 15.1% Jul 14.0% Aug 13.5% Sep 13.8% Oct 13.2% Nov 12.4% Dec 12.8% Jan-Feb % Mar 11.9% Apr 9.3% Source: National Bureau of Statistics, PRC 7. Growth of fixed asset investment decelerated in January to April The growth of China s nominal fixed asset investment (FAI) (excluding rural households) declined to 20.2% yoy in January to April 2012, compared to the 23.8% yoy growth recorded in FY11. 8 The moderation in the FAI growth could be attributed to the still tight credit conditions, the government efforts to cool the property market, as well as the deterioration in investor sentiment due to the growing concerns over an economic downturn in China. (See exhibit 13) Among different industries, FAI (excluding rural households) in the tertiary industry recorded a growth of 16.4% yoy, lower than that in the secondary industry (24.2% yoy), in January to April Also noteworthy is that the growth of FAI (excluding rural households) in real estate development decelerated rapidly to 18.7% yoy in January to April 2012, down from the 27.9% yoy growth recorded in FY11. Looking ahead, we expect China s overall FAI growth to moderate this year. In particular, the growth of FAI in real estate development is set to further decelerate in coming quarters, amid the cooling property market in China. According to the Government Work Report delivered by Premier Wen Jiabao on 5 March, the government will issue a set of detailed implementation rules for The opinions on encouraging and guiding the healthy development of the private investment (also known as the New 36-Clauses), and will strengthen its efforts to encourage private investments in sectors such as railway, finance, energy, telecom, education, healthcare, etc. We therefore expect more private investment in these sectors in coming future. Exhibit 13: China s FAI (excluding rural households), Oct Apr 2012 year-to-date yoy growth (%) Oct 11 Nov Dec Feb 12 Mar Apr FAI (excluding rural households) Source: National Bureau of Statistics, PRC 8 The National Bureau of Statistics has expanded the coverage of the monthly statistics on FAI from the urban areas to rural enterprises and institutions, effective from Thus, FAI (excluding rural households), the new indicator, has been released by the bureau since March 2011 to replace urban FAI, the old indicator. Besides, a new statistical criterion has been adopted. The statistical threshold for the size of investment project has been adjusted upward from 500,000 yuan to 5 million yuan. 9

10 Li & Fung China Trade Quarterly May 2012 Issue 26 II. Highlights 1. The Consumption Promotion Month campaign was held in early-april to early-may Promoting consumption is a long-term initiative of the Chinese government to help drive economic growth. The Ministry of Commerce (MOFCOM) held the campaign of the Consumption Promotion Month 9 from 2 April to 4 May 2012, as part of its efforts to stimulate domestic consumption. Over 80,000 companies launched over 800 activities to boost consumption, through working with local commerce departments and industry associations. For instance, major commercial banks offered zero transaction fees, zero down-payment, low interest installment plans for the purchases of large durable consumer goods. It is generally believed that this campaign will help boost China s retail sales of consumer goods in 2Q The Chinese government plans to lower import tariffs on certain types of daily use products On 28 March, the State Council announced a series of measures to boost China s imports. 10 One of the measures is to lower import tariffs on certain types of daily use products. In our view, the move will boost not only the imports but also the sales of related goods, as China s retailers will have more room to cut prices. So far, the details have not been announced yet. Some market observers predict that several types of food and beverage products, cosmetics and milk powder will be covered. We expect the details of the tariff cuts to be released in coming months. 3. The fuel prices were raised on 8 February and 20 March, but were then reduced on 10 May So far this year (i.e. as of 14 May 2012), the domestic retail fuel prices have gained % overall. On 8 February 2012, the Chinese government raised the maximum retail prices of gasoline and diesel by %. Afterwards, on 20 March, the government further increased the maximum retail prices of gasoline and diesel by %. On 10 May, the maximum retail prices of gasoline and diesel were reduced by %. The purpose of the price adjustments was to allow the domestic fuel prices to reflect the fluctuations in global crude prices between early October 2011 and early May The rise in fuel prices would increase transportation costs, as well as energy costs for manufacturers who run their own electrical generators in China. It is noteworthy that the adjustments made on 20 March were smaller than the rise in the benchmark crude prices, as the 22-day moving average of a basket of global crude prices had risen by more than 10% between 8 February and 20 March. 11 This shows that the government was concerned about the impact of the fuel price hikes on inflation. 4. The yoy growth rates of both money supply and RMB loans have improved slightly The yoy growth rates of both money supply and RMB loans have improved slightly. The growth of the broad money supply (M2) accelerated to 12.8% yoy as of end-april, up from the recent low of 12.4% yoy as of end-january. Meanwhile, the growth of the amount of total outstanding RMB loans improved to 15.4% yoy as of end-april, compared to the 15.0% yoy growth as of end-january In recent months, the total amount of new RMB loans has fluctuated. It rose markedly from 0.71 trillion yuan in February to 1.01 trillion in March, and then dropped to 0.68 trillion in April, the lowest in four months. (See exhibit 14) For more information, please refer to 11 According to the refined oil pricing mechanism, the government official would consider adjusting fuel prices when the 22-day moving average of a basket of global crude prices has changed by more than 4%. 10

11 Domestic and Foreign In our view, the slower-than-expected growth of China s exports, imports and industrial output in April increases the likelihood of further monetary easing. On 12 May, China s central bank announced to cut the banks reserve requirement ratio (RRR) by 50 bps effective from 18 May. This was the second time this year the central bank reduced the RRR. Looking ahead, it is widely expected that the central bank will continue to inject liquidity into the market through RRR cuts and open market operations in coming future. On the other hand, to fulfill the policy objectives as mentioned in the Government Work Report released in early March, it is likely that Chinese banks will further improve their loan structure, provide more credit support to key national projects, public housing construction, small and micro-sized enterprises, as well as tighten loans to energy-consuming industries, highly-polluting industries and those industries with excess capacity. Exhibit 14: Broad money supply (M2) and RMB loans As of Broad money supply (M2) Total outstanding RMB loans Amount (trillion yuan) yoy growth Amount (trillion yuan) yoy growth End-May % % End-Jun % % End-Jul % % End-Aug % % End-Sep % % End-Oct % % End-Nov % % End-Dec % % End-Jan % % End-Feb % % End-Mar % % End-Apr % % New RMB loans (trillion yuan) FY May Jun 0.63 Jul 0.49 Aug 0.55 Sep 0.47 Oct 0.59 Nov 0.56 Dec 0.64 Jan Feb 0.71 Mar 1.01 Apr 0.68 Source: People s Bank of China 11

12 Li & Fung China Trade Quarterly May 2012 Issue 26 Exhibit 15: Adjustments in one-year benchmark deposit and lending rates, Jan May 2012 (as of 14 May) Effective date Adjustment One-year benchmark deposit One-year benchmark lending rate after the adjustment rate after the adjustment 20 Oct bps 2.50% 5.56% 26 Dec +25 bps 2.75% 5.81% 9 Feb bps 3.00% 6.06% 6 Apr +25 bps 3.25% 6.31% 7 Jul +25 bps 3.50% 6.56% Source: People s Bank of China Exhibit 16: Reserve requirement ratio (RRR) adjustments, Jan May 2012 (as of 14 May) Effective date Adjustment RRR for the major banks after the adjustment* 18 Jan bps 16.0% 25 Feb +50 bps 16.5% 10 May +50 bps 17.0% 16 Nov +50 bps 17.5% 29 Nov +50 bps 18.0% 20 Dec +50 bps 18.5% 20 Jan bps 19.0% 24 Feb +50 bps 19.5% 25 Mar +50 bps 20.0% 21 Apr +50 bps 20.5% 18 May +50 bps 21.0% 20 Jun +50 bps 21.5% 5 Dec -50 bps 21.0% 24 Feb bps 20.5% 18 May -50 bps 20.0% * The major banks include Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank Source: People s Bank of China Snapshot: 2012 Policy focuses In the 5 th session of the 11 th National People s Congress (NPC) held in March, certain important documents, such as the Government Work Report, the Report on National Economic & Social Development, and the Central & Local Budgets, etc., were discussed and approved. Regarding the policy focuses, the key takeaways are: 1. The major policy objectives include maintaining stable and relatively fast growth, achieving price stability, adjusting the economic structure, improving people s livelihood and pushing forward reforms in key areas. To continue the proactive fiscal policy. A budgeted deficit of 800 billion yuan for 2012, including a 550 billion yuan central budget deficit and 250 billion yuan in local government bonds. The budgeted deficit for 2012 is lower than that for 2011 (i.e. 900 billion yuan), and is expected to decline to 1.5% of GDP. 12

13 Domestic and Foreign To continue the prudent monetary policy. The growth of the broad money supply (M2) in 2012 is targeted at around 14% yoy, slightly higher than the actual growth rate of 13.6% yoy as of end Also noteworthy is that the government will support the development of private financing, as well as promote the flexibility of the two-way movement of the RMB. 2. The government will strive to boost the consumption demand. To increase income of low- and middle-income households. To support the development of the service sector in areas such as services for the elderly, household services, healthcare services, etc.; to boost consumer spending in areas such as travelling, fitness services, cultural activities, etc. To promote the consumption of energy-saving and environmentally friendly products such as water-saving sanitary appliances, energy-efficient vehicles, environmentally-friendly building materials, etc. To foster the development of the distribution sector. 3. The government will further improve the investment structure. To maintain the stable growth of investment. To encourage private investment; to issue a set of detailed implementation rules for The opinions on encouraging and guiding the healthy development of private investment (also known as the New 36-Clauses); to encourage private investments in sectors such as railway, finance, energy, telecom, education, healthcare, etc. 4. The government will continue its efforts to achieve price stability. To effectively manage liquidity in the market. To boost the production and ensure the supply of major agricultural produce. To improve the efficiency of the distribution of agricultural produce and reduce distribution costs. 5. The government will continue to promote the steady development of the agriculture industry and boost farmers income. To increase farm subsidies and raise the minimum procurement prices of grain. To accelerate the construction of rural infrastructure. The central government expenditures on the agriculture industry, the rural areas and farmers will increase to 1,228.7 billion yuan in 2012, up by billion yuan from the previous year. 6. The government will further accelerate economic restructuring. To optimize and upgrade the industrial structure. To promote coordinated regional development; to implement The master strategy for regional development and The national territory development plan. To push forward urbanization in an appropriate manner. Migrant workers with stable jobs and homes in the urban areas will be granted the urban household registration in an orderly manner. To relax the requirements for obtaining the urban household registration in medium and small cities and towns; to improve public services and social welfare for migrant workers. 13

14 Li & Fung China Trade Quarterly May 2012 Issue 26 To strengthen energy conservation and environmental protection, and support ecological development; to start monitoring fine particulate matter which is less than 2.5 micrometers in diameter (PM 2.5) in the Beijing- Tianjin-Hebei region, the Yangtze River delta, the Pearl River delta, the municipalities and the provincial capitals this year. 7. The government will foster the development of science and technology, education and human resources in the country. The fiscal spending on education is budgeted to be equivalent to 4% of the GDP in The government will continue its efforts to improve people s livelihood. To further improve the social security system; to expand the coverage of the new old-age insurance programme for rural residents and the old-age insurance programme for urban residents to the whole country by the end of the year; to raise the basic pensions for enterprise retirees. To push forward the construction of public housing; to start the construction of more than 7 million units of public housing; to complete the construction of 5 million units of public housing by the end of the year. To bring down property prices to the reasonable levels ; to stringently carry out policies to curb property speculation; to increase the supply of ordinary commercial residential housing ; to push forward the reform of the property tax system. To further push forward the healthcare reform. The medical insurance subsidies will be raised to 240 yuan per person. 9. The government will further push forward reforms in the following areas: Fiscal & taxation system: consumption tax, resources tax, etc. Financial system: interest rates, capital account convertibility of the RMB, etc. Resources pricing mechanisms and tariff mechanisms: refined oil products, natural gas, water and electricity, etc. To carry out trials of trading carbon-emissions rights and pollution rights. 10. The government will continue its efforts to carry out the open door policy. To maintain the existing policy on export tax rebate; to strengthen the development of trade finance and export credit insurance. To consolidate market shares in China s traditional export markets such as the US, Japan and Europe, and to develop the emerging markets. To stabilize the exports of labour-intensive products, to expand the exports of high value-added and high technology products, and to curb the exports of energy-intensive and highly-polluting products. To improve import policies. 14

15 Domestic and Foreign III. Outlook 1. Major macroeconomic targets for 2012 The 5 th session of the 11 th National People s Congress (NPC) was concluded in mid-march A number of major macroeconomic targets for 2012 were announced (See exhibit 17). It is noteworthy that the government set a lower real GDP growth target of 7.5% for this year, compared with the 8% target of the previous years. This signals that the government is willing to tolerate slower economic growth, while making efforts to transform the pattern of economic development. This also suggests that the government is unlikely to launch a massive stimulus package in the foreseeable future. That being said, we still expect China s real GDP growth to exceed 8% this year, amidst the improved credit conditions in China. Exhibit 17: Major macroeconomic targets set for Real GDP growth of 7.5% (vs. 9.2% actual in 2011). 2. Value added of the tertiary industry to rise by 7.9% in real terms (vs. 8.9% actual in 2011). 3. Over 9 million new jobs for urban residents (vs million actual in 2011); and the registered unemployment rate of no more than 4.6% (vs. 4.1% actual as of end-2011). 4. CPI growth of around 4% (vs. 5.4% actual in 2011). 5. Fixed asset investment to grow by 16% (vs. 23.6% actual in 2011). 6. Retail sales of consumer goods to increase by 14% (vs. 17.1% actual in 2011). 7. Total imports and exports to rise by 10% (vs. 22.5% actual in 2011). 8. Urbanization rate to reach 52.07% (vs % actual in 2011). Source: The Government Work Report, delivered by Premier Wen Jiabao on 5 March 2012; the Report on National Economic & Social Development 2. Chinese consumers are getting older and richer In its latest report, McKinsey & Company makes some predictions about the profiles of Chinese consumers in One key takeaway is that the per capita disposable income of urban consumers is predicted to double in ten years, from US$ 4,149 in 2010 to US$ 8,185 in According to the projections by McKinsey, the proportion of consumers with disposable income between US$ 16,000 and US$ 34,000 among all urban consumers in China will reach 51% in 2020, up sharply from 6% in 2010; whereas the proportion of urban consumers with disposable income between US$ 6,000 and US$ 16,000 will drop from 82% in 2010 to 36% in Meanwhile, the share of the affluent urban consumers (i.e. those with disposable income of more than US$ 34,000) will rise from 2% in 2010 to 6% in Another takeaway is that China s elderly population is set to increase at a rapid pace in the coming future. McKinsey predicts that the proportion of the population aged over 65 will rise from 10% in 2010 to 15% in 2020, as a result of the rise in life expectancy and the lower birth rate after the introduction of the one-child policy in late 1970s. The population aged over 65 is predicted to increase by million in ten years, representing great potential in the silver market (i.e. the market for the elderly). Besides, what is more important is the way in which the spending patterns of the elderly in 2020 will differ from those of the elderly now. The elderly in 2020 are likely to spend less on food but more on discretionary items. The changing profiles of Chinese consumers will bring about changes in the demand structure for consumer products. Wholesalers and retailers in China will need to revise their business strategies to address the new market opportunities. 12 McKinsey & Company, Meet the 2020 Chinese Consumer, March

16 Li & Fung China Trade Quarterly May 2012 Issue China s Entrepreneur Confidence Index has rebounded China s Entrepreneur Confidence Index (ECI) rebounded from the recent low of in 4Q11 to in 1Q12, indicating that Chinese entrepreneurs have turned more optimistic about the future prospects of their respective industries. 13 (See exhibit 18) Among different sectors, the ECIs of the social services sector and the property sector posted relatively sharp quarterly gain in 1Q12, up by 7.9 points and 7.5 points respectively from 4Q11. On the other hand, the transportation, storage & post service sector recorded the biggest qoq drop in 1Q12, the ECI of which fell by 4.1 points from the previous quarter. The ECI of the wholesale and retail sector in 1Q12 was almost the same as the index in 4Q11. Among regions, the ECI in the central region was the highest, registering in 1Q12. Meanwhile, the ECIs in the eastern and the western regions were and respectively in 1Q12. (See exhibit 19) Exhibit 18: Entrepreneur Confidence Index 1Q11 2Q11 3Q11 4Q11 1Q Source: National Bureau of Statistics, PRC Exhibit 19: Entrepreneur Confidence Index, by sector 4Q11 1Q12 Compared with the previous quarter National Higher By sector Secondary industry Higher Construction Higher Transportation, storage & post service Lower Wholesale & retail NA Almost the same Property Higher Social services Higher Information transmission, computer service Lower and software Hotel & catering Lower By region Eastern region NA NA Central region NA NA Western region NA NA Source: National Bureau of Statistics, PRC 13 The NBS has changed the method of compiling the index, and has started to release the index based on a new methodology since 1Q12. Under the new methodology, the ECI reflects both the entrepreneurs assessments of the current situations of their respective industries and their expectations of the future situations. In the past, the ECI purely reflected the entrepreneurs assessments of the current situations of their respective industries. To maintain the continuity of the data, the historical figures (i.e. indices compiled throughout 1Q11 to 4Q11) were also adjusted accordingly. China s Entrepreneur Confidence Index (ECI) ranges from 0 to 200. A reading above 100 indicates that entrepreneurs tend to be optimistic; a reading below 100 indicates that entrepreneurs tend to be pessimistic. 16

17 Domestic and Foreign 4. The PMI reached a thirteen-month high of 53.3 in April China s manufacturing PMI rose all the way from 50.5 in January to 53.3 in April, the highest in thirteen months. The PMI has stayed above the critical level of 50 for five consecutive months, suggesting that the manufacturing sector in China has continued to expand. (See exhibit 20) Both the new orders index and the new export orders index also showed rebound in recent months, implying that both domestic and export sales are set to improve in coming future. The new orders index picked up markedly from 50.4 in January to 55.1 in March, and then moderated to 54.5 in April, while the new export orders index rose all the way from 46.9 in January to 52.2 in April. 14 The output index, on the other hand, increased all the way from 53.6 in January to a sixteen-month high of 57.2 in April. The index readings suggest that China s industrial production growth is set to accelerate in coming months. The input prices index jumped by 4.0 points to reach 54.0 in February and climbed further to 55.9 in March, before moderating to 54.8 in April. The rise in input prices was largely driven by the surge in oil prices amid the Middle East tensions. The upstream cost pressures were increasing but still mild, implying that inflationary expectations for downstream prices will not be as strong as before. The stocks of major inputs index has continued to stay below 50 since May The index fluctuated within the range of 48.5 to 49.7 throughout January to April. This suggests the lack of confidence and incentives of Chinese manufacturers to hold inventories of raw materials, amidst external economic uncertainties and fluctuating input prices. Meanwhile, the stock of finished goods index rose from 48.0 in January to 50.5 in February and 50.8 in March, and then fell to 49.5 in April. The rebound in the index in February and March could be attributed to the post-chinese New Year restocking activities. Looking forward, we expect the headline PMI to fluctuate between in 2Q12. Industrial activities will continue to be supported by local governments accelerated efforts to build public housing, and possibly also by the improvement in domestic and foreign demand. On the other hand, the biggest external risk comes from Europe s unresolved debt crisis; while the major internal risk would be a slump in the property market amid stringent government measures. Besides, Chinese manufacturers will continue to face difficulties such as rising labour costs, labour shortages and greater environmental compliance cost. Exhibit 20: China s manufacturing PMI at a glance, April 2012 Index S. Adj Index Index Compared with the Previous Month Direction PMI 53.3 Higher Expanding Output 57.2 Higher Expanding New Orders 54.5 Lower Expanding New Export Orders 52.2 Higher Expanding Backlogs of Orders 48.4 Lower Contracting Stocks of Finished Goods 49.5 Lower Contracting Purchases of Inputs 54.4 Lower Expanding Imports 50.5 Lower Expanding Input Prices 54.8 Lower Expanding Stocks of Major Inputs 48.5 Lower Contracting Employment 51.0 Unchanged Expanding Suppliers Delivery Time 49.6 Higher Slackening Source: China Federation of Logistics & Purchasing; National Bureau of Statistics, PRC 14 The new orders index covers both domestic orders and export orders. That is to say, the manufacturers are not asked to differentiate between domestic orders and export orders when filling in the questionnaires. 17

18 Li & Fung China Trade Quarterly May 2012 Issue 26 Part Two: Foreign Trade I. Recent development 1. Growth of both China s exports and imports decelerated in January to April China s export growth decelerated from 14.3% yoy in 4Q11 to 7.6% yoy in 1Q12 and 4.9% yoy in April, indicating the sharp moderation in export demand. Overall, in January to April, China s exports amounted to US$ billion, up by 6.9% yoy from the same period in the previous year. (See exhibits 21, 22 and 23) In January to April, China s exports to the US and some major emerging economies such as the Association of South East Asian Nations (ASEAN), Brazil and Russia recorded double digit growth, while exports to the European Union (EU) posted negative growth. China s exports to the US increased by 12.0% yoy in January to April, higher than China s total export growth during the period (6.9% yoy). Such figures show that the demand from the US was relatively strong. In contrast, China s exports to the EU dropped by 2.0% yoy in January to April, down from the 14.4% yoy growth recorded in FY11. Meanwhile, China s export growth to ASEAN, Brazil and Russia decelerated to 10.9% yoy, 13.3% yoy and 14.3% yoy respectively in January to April, compared to the growth of 23.1% yoy, 30.2% yoy and 31.4% yoy respectively in FY11. China s import growth declined markedly from 20.1% yoy in 4Q11 to 6.9% yoy in 1Q12 and 0.3% yoy in April, owing to the weakening domestic demand. It is noteworthy that, in January to April, imports of mechanical and electrical products, which accounted for 40.3% of China s total imports over the same period, fell by 1.6% yoy, as compared to the growth of 14.1% yoy in FY11. Overall, in January to April, China s imports amounted to US$ billion, up by 5.1% yoy. For the first time since March 2011, China recorded a trade deficit of US$ 31.5 billion in February, due largely to the marked drop of the total export value. In our view, this was mainly due to a seasonal slowdown in production activities. In fact, China s trade balance turned positive again in March and in April, with the normalization of production activities. Exhibit 21: China s quarterly foreign trade data, 2Q11-1Q12 USD billion (yoy growth) Exports Imports Trade Balance FY11 1,898.6 (20.3%) 1,743.5 (24.9%) (-14.5%) 2Q (22.0%) (23.1%) 46.4 (13.2%) 3Q (20.5%) (24.8%) 62.7 (-3.5%) 4Q (14.3%) (20.1%) 48.2 (-21.8%) 1Q (7.6%) (6.9%) 0.6 (-130.4%) Source: China Customs 18

19 Domestic and Foreign Exhibit 22: China s monthly foreign trade data, May Apr 2012 USD billion (yoy growth) Exports Imports Trade Balance May (19.3%) (28.4%) 13.0 (-33.2%) Jun (17.9%) (19.2%) 22.2 (10.3%) Jul (20.4%) (23.9%) 30.4 (6.1%) Aug (24.4%) (30.1%) 17.8 (-10.0%) Sep (17.0%) (20.8%) 14.5 (-12.4%) Oct (15.8%) (28.6%) 17.1 (-36.3%) Nov (13.8%) (22.0%) 14.6 (-34.4%) Dec (13.4%) (11.8%) 16.5 (31.4%) Jan (-0.5%) (-15.3%) 27.3 (368.3%) Feb (18.4%) (39.6%) (302.7%) Mar (8.9%) (5.3%) 5.3 (-3,948.9%) Apr (4.9%) (0.3%) 18.4 (63.6%) Source: China Customs Exhibit 23: Growth rates of exports and imports, May Apr 2012 Source: China Customs 19

20 Li & Fung China Trade Quarterly May 2012 Issue 26 Exhibit 24: Exports by category, 2011 & 1Q12 yoy growth (%) of export value, calculated in US$ Q12 Textile materials & products Garments & clothing accessories Footwear Toys Coal Crude oil Refined oil Steel Mechanical & electrical products Source: China Customs Exhibit 25: Imports by category, 2011 & 1Q12 yoy growth (%) of import value, calculated in US$ Q12 Cereal & cereal flour Soybean Iron ore Crude oil Refined oil Steel Synthetic yarn Vehicles and related parts Source: China Customs Exhibit 26: Foreign trade of China (general & processing trade), Q12 yoy growth (%) Share (%) Item FY11 4Q11 1Q12 FY11 4Q11 1Q12 Exports Of which: General Trade Processing Trade Imports Of which: General Trade Processing Trade Total of Imports and Exports Of which: General Trade Processing Trade Source: China Customs 20

21 Domestic and Foreign 2. General trade continued to grow faster than processing trade The trade value under general trade 15 grew faster than that under processing trade 16 in 1Q12 and in April. China s exports under general trade grew by 7.9% yoy and 5.8% yoy in 1Q12 and April respectively, while imports under general trade gained 8.2% yoy and 1.9% yoy in 1Q12 and April respectively. (See exhibit 26) In comparison, both exports and imports under processing trade showed slower growth. Exports under processing trade grew by 6.3% yoy and 2.7% yoy in 1Q12 and April respectively, while imports under processing trade gained 1.2% yoy in 1Q12 and then dropped by 4.2% yoy in April. As a result, the share of processing trade in China s total trade declined from 35.8% in 2011 to 35.5% in 1Q12 and 35.1% in April. Nevertheless, processing trade still plays an important role in China s foreign trade, especially as processing trade recorded a large trade surplus of US$ 87.4 billion in 1Q12. In contrast, general trade recorded a trade deficit of US$ 51.7 billion over the same period. 3. Growth of China s trade with its major trading partners decelerated; China s trade with Japan posted negative yoy growth in January to April Same as in 2011, the European Union (EU) was China s biggest trading partner in January to April Sino-EU trade amounted to US$ billion in January to April, accounting for 14.6% of China s total foreign trade. In January to April, Sino-EU trade recorded slight growth of 0.3% yoy, down markedly from the 18.3% yoy growth recorded in FY11. China s export growth to the EU decelerated from 14.4% yoy in FY11 to -2.0% yoy in January to April 2012, while the growth of China s imports from the EU fell from 25.4% yoy in FY11 to 4.0% yoy in January to April. The US was China s second largest trading partner in January to April, with Sino-US trade accounting for 12.5% of China s total foreign trade over the same period. Sino-US trade registered weaker growth of 9.2% yoy in January to April, as compared to the growth of 15.9% yoy in FY11. This was mainly due to the deceleration in the growth of China s imports from the US, which fell sharply from 19.6% yoy in FY11 to 3.2% yoy in January to April Meanwhile, China s export growth to the US was 12.0% yoy in January to April, softening from the 14.5% yoy growth recorded in FY11. China s trade with the Association of South East Asian Nations (ASEAN) increased by 6.7% yoy to reach US$ billion in January to April, accounting for 10.1% of China s total foreign trade. It is noteworthy that ASEAN has overtaken Japan to become China s third largest trading partner since 1H11, helped by the rapid growth of Sino-ASEAN trade. Trade cooperation between China and the member countries of ASEAN have been enhanced significantly by the ASEAN-China Free Trade Area (ACFTA) agreement effective since 1 January Japan was the fourth largest trading partner of China in January to April. Sino-Japan trade shrank by 1.5% yoy to US$ billion in January to April 2012, accounting for 9.2% of China s total foreign trade. China s export growth to Japan decelerated to 9.0% yoy in January to April, as compared to the 22.5% yoy growth recorded in FY11. On the other hand, China s imports from Japan posted a negative growth of -8.9% yoy in January to April, down from the 10.1% yoy growth recorded in FY11. (See exhibits 27 & 28) 15 General trade refers to the import or export of goods by enterprises in China with import-export rights. According to the Chinese statistics, the scope of general trade covers: import and export using loans or aids; the import of materials by foreign invested enterprises (FIEs) for processing of goods for sale in the domestic market; the export of goods purchased by FIEs or manufactured by processing domestically-produced materials; the import of food and beverages by restaurants and hotels; the supply of domesticallyproduced fuel, materials, parts and components to foreign vessels or aircraft; the import of goods as payment in kind in lieu of wages in labour service cooperation projects with foreign countries; and the export of equipment and materials by enterprises in China for their investment abroad. 16 Processing trade refers to the business activity of importing all or part of the raw and auxiliary materials, parts and components, accessories, and packaging materials from abroad, and re-exporting the finished products after processing or assembling by enterprises within the Chinese Mainland. 21

22 Li & Fung China Trade Quarterly May 2012 Issue Growth of China s imports from Brazil and India dropped markedly in January to April The growth of China s imports from Brazil and India dropped markedly in January to April this year. China s imports from Brazil gained 15.2% yoy in January to April, down from the growth of 37.3% yoy in FY11; The growth rate of China s imports from India decelerated to -12.3% yoy in January to April, as compared to the 12.1% yoy growth recorded in FY11. Meanwhile, the growth rate of China s imports from Russia remained strong at 39.4% yoy in January to April 2012, as compared to the 55.6% yoy growth recorded in FY11. Together these three members of the BRIC accounted for 7.0% of China s total imports in January to April 2012, up from 6.7% in FY11. China s exports to some major emerging economies have become an increasingly important driver of China s export growth. For example, the growth rates of China s exports to Brazil and Russia were 13.3% yoy and 14.3% yoy respectively in January to April, much higher than China s total export growth over the same period (6.9% yoy). China s exports to India, however, fell by 1.0% yoy in January to April. Together these three members of the BRIC accounted for 6.1% of China s total exports in January to April 2012, down from 6.4% in FY11. (See exhibits 27 & 28) Exhibit 27: China s trading partners, 1Q12 Country Trade value Share of Export value Import value yoy growth (%) /Region (USD billion) total trade (%) (USD billion) (USD billion) Total trade Exports Imports EU US ASEAN Japan Brazil Russia India Source: China Customs Exhibit 28: China s trading partners, comparing the growth rates of 2011 & 1Q12 yoy growth (%) Country/Region Total trade Exports Imports Q Q Q12 EU US ASEAN Japan Brazil Russia India Source: China Customs 22

23 Domestic and Foreign 5. The growth rates of exports from Jiangsu, Shanghai and Shandong were respectively low in 1Q12 The top seven provinces/ municipalities in terms of foreign trade value Guangdong, Jiangsu, Shanghai, Beijing, Zhejiang, Shandong and Fujian jointly accounted for 80.9% of China s total foreign trade in 1Q12, down from 81.5% in FY11. (See exhibit 29) These seven provinces, which are located in the eastern region of China, jointly accounted for 80.8% of China s total exports in 1Q12. The exports of six of these seven provinces only recorded single-digit growth in 1Q12. In particular, the growth rates of exports from Jiangsu, Shanghai and Shandong were as low as 2.8% yoy, 3.2% yoy and 1.3% yoy respectively in 1Q12. Meanwhile, the exports from some central and western provinces recorded robust growth in 1Q12. For example, the exports from Chongqing, Henan, Guangxi Zhuang Autonomous Region and Sichuan soared by 1.5 times, 1.4 times, 41.2% yoy and 31.9% yoy respectively in 1Q12. We believe that the strong growth of exports from these provinces can be explained by the relocation of factories from the eastern provinces. Exhibit 29: The top seven provinces/ municipalities in terms of foreign trade value, 1Q12 Provinces Total trade Exports /municipalities amount yoy growth amount yoy growth (USD billion) (%) (USD billion) (%) Guangdong Jiangsu Shanghai Beijing Zhejiang Shandong Fujian Source: China Customs 6. China s FDI has posted negative yoy growth for six consecutive months China s FDI edged down by 0.7% yoy in April, posting negative yoy growth for six consecutive months. Overall, in January to April 2012, China s FDI declined by 2.4% yoy to US$ 37.9 billion, compared to the 9.7% yoy growth recorded in FY11. (See exhibit 30) Among sectors, FDI in the manufacturing sector dropped by 4.4% yoy in January to April, while that in the service sector was down by 3.1% yoy over the same period. The growth rates of FDI in different regions in China diverged in January to April. FDI in the central region grew by 12.6% yoy in January to April, while FDI in the eastern and the western regions posted negative growth of -2.5% and -15.2% yoy respectively over the same period. With the European debt crisis remaining unresolved, FDI from the EU fell markedly by 27.9% yoy to US$ 1.9 billion in January to April, down from the negative growth of -3.7% yoy in FY11. By contrast, FDI from the US and Japan registered positive growth of 1.9% yoy and 16% yoy respectively in January to April. 23

24 Li & Fung China Trade Quarterly May 2012 Issue 26 Exhibit 30: China s foreign direct investment (FDI), May Apr 2012 Amount (US$ billion) yoy growth FY % 1Q % May % Jun % Jul % Aug % Sep % Oct % Nov % Dec % Jan % Feb % Mar % Apr % Source: Ministry of Commerce, PRC 7. China s foreign exchange reserves posted quarterly gain again in 1Q12 China s foreign exchange reserves gained US$ billion in 1Q12, after posting quarterly drop in 4Q11. As of end- 1Q12, China s foreign exchange reserves amounted to US$ 3,305.0 billion, the highest on record. (See exhibit 31) Considering that China recorded a trade surplus of US$ 0.6 billion and FDI amounted to US$ 29.5 billion in 1Q12, we believe that the increase in the foreign exchange reserves in the quarter was largely the result of foreign capital inflows, as well as the rise in value of Euro-denominated assets held by the Chinese government due largely to the depreciation of the US dollar against the Euro. 17 Looking ahead, the confidence in China s future growth, the market expectations of RMB appreciation, as well as the strength of the Euro will continue to significantly affect the foreign exchange reserves in the near term. Exhibit 31: Foreign exchange reserves by quarter, 2Q11-1Q12 USD billion Accumulation End of the quarter FY , Q , Q , Q , Q ,305.0 Source: State Administration of Foreign Exchange, PRC 17 The nominal USD/Euro exchange rate was on 30 March 2012, down from on 30 December

25 Domestic and Foreign II. Highlights 1. The nominal RMB/ USD exchange rate has continued to fluctuate The nominal RMB/ USD exchange rate has fluctuated within the range of so far this year (as of 15 May). It is noteworthy that the nominal RMB/ USD exchange rate advanced to on 2 May, the highest level since the introduction of the reform of the RMB exchange rate regime in late July 2005, but then declined to on 15 May. On the other hand, the RMB has appreciated against the Euro since late February: The nominal RMB/Euro exchange rate advanced from the recent low of on 29 February to on 15 May. (See exhibit 32) According to the Bank for International Settlements, the real effective exchange rate (REER) of the RMB fluctuated within the range of throughout January to April, after softening from the recent peak of in December. 18 Overall, the RMB depreciated by 0.5% in real terms against its trading partners in the first four months of (See exhibit 33) On 14 April 2012, China s central bank announced that the daily trading band of the RMB against the US dollar would be widened from ±0.5% to ±1.0% around the daily fixing rate (also known as the central parity rate) 19, effective from 16 April. 20 A major purpose of the move is to further improve the RMB exchange rate regime, which is largely based on market supply and demand and operates with reference to a basket of currencies. In our view, this shows that the Chinese government stays committed to its currency reform. The implication to Chinese exporters is that they will probably find it more difficult to sell products at the right prices, with the bigger volatility of the nominal RMB/ USD exchange rate. In view of the slowing export growth in recent months, we believe that a rapid RMB appreciation against the US dollar in the near term is highly unlikely. However, as the international pressure for RMB appreciation is still intense, we maintain our forecast that the RMB will appreciate at a slower pace against the US dollar this year. We predict that the nominal RMB/USD exchange rate will appreciate by around 1-2% this year to reach at end The Bank for International Settlements (BIS) calculates effective exchange rate (EER) indices for a total of 61 economies (including individual euro area countries and, separately, the euro area as an entity). Nominal EERs are calculated as geometric weighted averages of bilateral exchange rates. Real EERs are the same weighted averages of bilateral exchange rates adjusted by relative consumer prices. The weighting pattern is time-varying, and the most recent weights are based on trade in The China Foreign Exchange Trade System (CFETS), a sub-institution of the People's Bank of China, releases the central parity rate of the RMB against the USD at 9:15 am on each working day

26 Li & Fung China Trade Quarterly May 2012 Issue 26 Exhibit 32: RMB/USD and RMB/Euro, May May 2012 Source: State Administration of Foreign Exchange Exhibit 33: RMB REER, May Apr 2012 Source: Bank for International Settlements 26

27 Domestic and Foreign 2. Enterprises with import and export qualifications in China are allowed to settle merchandise exports in RMB with their foreign customers Recently, the Chinese government has further expanded the pilot program for using RMB for cross-border trade settlement to cover more enterprises. According to the notice posted on the website of the People s Bank of China on 2 March, enterprises with import and export qualifications in China are allowed to settle merchandise exports in RMB with their foreign customers. 21 The policy move has greatly increased the number of enterprises eligible for settling merchandise exports in RMB, compared with less than 70,000 designated enterprises previously. We therefore expect the volume of exports settled in RMB to grow considerably in coming future. Traditionally, foreign enterprises use foreign currencies to settle trade with their Chinese suppliers - and the US dollar is the most commonly used currency. It is likely that more and more enterprises will pay their Chinese suppliers directly in RMB in the foreseeable future. One main reason is that Chinese suppliers will have more room to reduce prices of products, if foreign enterprises are willing to settle trade in RMB. In recent years, the RMB has continued to appreciate against the US dollar. The use of RMB in trade settlement would reduce the currency risk exposure and the costs to hedge against such risks for Chinese enterprises. Besides, it would save them the cost of handling currency exchanges. 3. The guiding opinion on accelerating the transformation of the pattern of development of foreign trade was jointly released by ten government departments In mid-february, ten government departments in China, namely the Ministry of Commerce, the National Development and Reform Commission, the Ministry of Finance, the People s Bank of China, China Customs, the State Administration of Taxation, the General Administration of Quality Supervision, Inspection and Quarantine, the China Banking Regulatory Commission, the China Insurance Regulatory Commission and the State Administration of Foreign Exchange, jointly released The guiding opinion on accelerating the transformation of the pattern of development of foreign trade. This important document outlines the development goals, the major tasks and the policy directions of China s foreign trade. The document suggests that the government should provide strong policy support to exports of high valueadded products, industrial relocation to the central and western regions of China, as well as expanding the market shares of Chinese products in the emerging countries in coming future Growth of the global merchandise trade decelerated in 2011 In mid-april, the World Trade Organization (WTO) released the world trade statistics for 2011 and its forecasts. 23 According to the institution, the growth of the volume of the global merchandise trade decelerated from 13.8% yoy in 2010 to 5.0% yoy in 2011, with the global economy losing momentum. Boosted by the increase in commodity prices, the global merchandise trade in current US dollar terms rose by 19% yoy to US$ 18.2 trillion in 2011, higher than the previous peak of US$ 16.1 trillion in (See exhibit 34) For more details, please refer to

28 Li & Fung China Trade Quarterly May 2012 Issue 26 In 2011, the volume of the merchandise exports from the developed economies increased by 4.7% yoy, led by the strong growth of the exports from the US. In volume terms, the merchandise exports from the US gained 7.2% yoy, while those from the EU grew by 5.2% yoy in Meanwhile, the merchandise exports from Japan fell by 0.5% yoy in 2011, as the earthquake in March had caused widespread disruption to supply chains in various industries. In comparison, the developing economies (including the Commonwealth of Independent States) fared slightly better in merchandise exports, which rose by 5.4% yoy in volume terms in Among the major emerging economies, the volume of the merchandise exports from India posted the fastest growth of 16.1% yoy in 2011, while that from China gained 9.3% yoy. It is noteworthy that, in 2011, the exports from the emerging economies were adversely affected by a number of supply chain disruptions, including the civil war in Libya, the severe floods in Thailand and the Japanese earthquake. Looking ahead, the WTO predicts that the growth of the volume of the global merchandise trade will moderate to 3.7% yoy in 2012; the volume of the merchandise exports from the developed economies will increase by 2.0%; and that from the developing economies will rise by 5.6% in 2012; the volume of the merchandise imports from the developed economies will gain 1.9%; and that from the developing economies will grow by 6.2% in Exhibit 34: Merchandise exports and imports by region, annual growth (%) of volume Exports Imports World North America South and Central America Europe Commonwealth of Independent States (CIS) Africa Middle East Asia Source: WTO 28

29 Domestic and Foreign III. Outlook 1. The recent indicators paint a mixed picture of the US recovery The recent indicators paint a mixed picture of the US recovery. The US economic growth moderated in 1Q12, due largely to the deceleration in the private inventory investment. The US real GDP grew at an annual rate of 2.2% in 1Q12, down from 3.0% in 4Q11. The good news is that the real growth rate of the personal consumption expenditures accelerated from an annual rate of 2.1% in 4Q11 to 2.9% in 1Q12, reflecting the improvement in consumer spending. (See exhibit 35) On the production side, the mom growth of the industrial output decelerated all the way from 0.9% mom in December to 0.0% mom in February, and then stayed at 0.0% mom in March. (See exhibit 36) Besides, according to the Institute for Supply Management, the manufacturing PMI declined from 54.1 in January to 52.4 in February, but then rebounded to 53.4 in March and 54.8 in April, the highest in ten months. On the other hand, according to the US Department of Commerce, new orders for manufactured durable goods fell by 1.5% mom in March on a seasonallyadjusted basis, posting negative mom growth in two of the last three months. The US non-manufacturing sector has expanded at a slower pace recently. According to the Institute for Supply Management, the non-manufacturing index (NMI) rose from 56.8 in January to the recent peak of 57.3 in February, and then dropped to 56.0 in March and 53.5 in April. The domestic consumption demand has moderated in recent months. According to the US Department of Commerce, the mom growth of the US retail sales decelerated from 1.0% mom in February to 0.7% mom in March and 0.1% mom in April. Meanwhile, confidence among the US consumers has continued to rise. The Reuters/ University of Michigan index of consumer sentiment increased all the way from 69.9 in December to 76.4 in April, the highest since March (See exhibit 37) Nevertheless, the pace of job creation in the US slowed in March and April. The non-farm payroll employment gained by only 154,000 and 115,000 in March and April respectively, after increasing by 275,000 and 240,000 in January and February respectively. On other hand, the US unemployment rate edged down from 8.3% in February to 8.2% in March and 8.1% in April. (See exhibit 38) Looking ahead, it is widely expected that the US recovery is set to continue in the foreseeable future. In its latest report, the International Monetary Fund (IMF) projects that the real GDP growth in the US will improve to 2.1% and 2.4% in 2012 and 2013 respectively, up from the 1.7% growth recorded in Exhibit 35: US national accounts, Q12 annual growth (%) Q11 3Q11 4Q11 1Q12 GDP Source: US Department of Commerce 24 IMF, World Economic Outlook, April

30 Li & Fung China Trade Quarterly May 2012 Issue 26 Exhibit 36: US industrial output growth, Oct Mar 2012 mom growth (%), seasonally adjusted Oct 11 Nov Dec Jan 12 Feb Mar Industrial output Source: US Federal Reserves Exhibit 37: US consumer market, Nov Apr 2012 nov 11 Dec Jan 12 Feb Mar Apr Retail and food services sales (mom growth %, seasonally adjusted) Reuters/University of Michigan index of consumer sentiment CPI (yoy growth %) Source: US Department of Commerce, Reuters/University of Michigan Surveys of Consumers, US Department of Labor Exhibit 38: US employment situation Unemployment Nonfarm payroll employment, May Apr 2012 rate (%) In thousands, seasonally adjusteded May Jun 9.1 Jul 9.1 Aug 9.1 Sep 9.0 Oct 8.9 Nov 8.7 Dec 8.5 Jan Feb 8.3 Mar 8.2 Apr 8.1 yearly figures: annual average; monthly figures: seasonally adjusted Source: US Department of Labor 2. The Eurozone economy posted zero quarter-on-quarter growth in 1Q12 After registering 0.1% quarter-on-quarter (qoq) in 3Q11, the real GDP growth in the Eurozone 25 dropped to -0.3% qoq in 4Q11, and then rebounded to 0.0% qoq in 1Q12. (See exhibit 39) 25 Estonia has become the 17th member of the Eurozone since 1 January And the other member countries include Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Spain and Slovakia. 30