China Economic Outlook 2013

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1 China Economic Outlook 2 Key Developments in Brief - Mild recovery of GDP growth: % - Construction and consumption as main drivers - Inflationary pressure to increase: +3% - Tight labor market and raising wages to continue - Weak export markets, but slight recovery - Further moderate appreciation of RMB - Increased RMB usage for international payments - Government transition complete in March - Cautious reforms with focus on stability by new leadership Key Economic Indicators In % yoy basis/ Source: NBS GDP Investment and Output Utilized FDI Fixed Asset Invest Industrial Production Economic Development 2 CPI PPI Export Value Import Value marked the first year that the government revised its GDP growth target downward marking an end to the rapid double digit growth. As the economy is maturing and a more sustainable development is desired, slower future growth levels are to be expected. In response to the slowdown 2 the government implemented a variety of monetary and fiscal measures to stimulate growth. The government resisted to launch a major stimulus program, focusing on increasing liquidity, some tax relief meassures and accelerated infrastructure spending. During Q4 major economic indicators began to accelerate, allowing a carefully more optimistic outlook for 2. The effects of the stimulus will continue to drive consumer and investment spending throughout 2.

2 Economic Outlook 2 Various GDP growth forecasts 2 Growth for 2 is widely anticipated to outperform growth of the previous year by about.5 percentage points, reaching between 8-8.5%, with strongest growth around the middle of the year. The economic recovery is projected to be rather mild making cautious monetary and fiscal measures in support of growth likely in the first few months of the year. The current sound macroeconomic situation leaves sufficient room for policy adjustments, although inflation, which has been picking up in December, will be a key concern. The government under its new leadership will need to fine tune its economic policies, focusing on strengthening growth within a volatile economic environment and continue restructuring the economy as the Chinese growth model is in need for revision. The new leadership under president Xi Jinping has outlined that boosting urbanization and consumption are key targets in 2. In light of the power transition which will be completed in March, it is widely expected that the government s focus will be on maintaining stable economic policies in 2 with no major commitment to fundamental reform. Growth Drivers Challenges Reforms Infrastructure and construction Struggling major export markets / Urbanization and hukou reforms including tensions with Japan Retail and consumption Excessive production capacity in some industries Income distribution reform and social security Services Increasing housing prices Reform of SOE monopolies Industrial upgrading Defaulting credits and financing of SMEs RMB internationalization

3 Economic Outlook 2 Labor Market Most of 2 has been marked by easing inflation, with the CPI slightly increasing towards the end of the year. The PPI has been falling throughout 2 and is expected to moderately increase over the year. Inflationary pressure is forecasted to accelerate slightly, with the CPI expanding by around 3% in 2. Factors driving inflation include excessive liquidity, raising food prices, as well as real estate prices. Overall inflation is expected to remain at steady levels which would allow for proactive monetary and fiscal policies to stimulate the economy. With key exports markets continuing to struggle China s foreign trade will continue to be under pressure in 2. After missing the growth target of % in 2, foreign trade growth is expected to slightly rebound to about 8% this year with import growth expected to outpace exports. Trade protectionism, rising production costs, RMB appreciation and sluggish export markets will continue to challenge China s trade environment. Increasing wages levels will remain an important goal of the government as it is trying to reduce the large wealth gap and tries to boost consumption. As of January Beijing, Shaanxi, and Zhejiang have published new minimum wage adjustments, increasing the minimum wage between 11-15%. Further adjustments can be expected for other provinces with similar increases. Overall wages are expected to increase at about %. An income distribution reform targeting the lower and middle income group can be expected, although no details have yet emerged. Changes to the labor contract law will be effective as of July 2. For detailed labor market information please refer to our latest Wage Survey Report. For any further questions please feel free to contact us: Contact: Max J. Zenglein, Economic Analyst Greater China zenglein.max@gz.china.ahk.de Phone: Fax:

4 Monthly Key Economic Indicators 2 Growth rate in percent on y-o-y basis, expect PMI (index) Source: NBS Gross Domestic Product ,9,3 9, 9,8 9,7 9,5 9,1 8,9 8,1 7,9 7, 7,4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q ,5 3,2 3, 3,4 3 2,2 2,5 1,8 2 1,9 1,7 2,7 -,3 Jan Feb Mar Apr -,7 May-1,4 Jun Jul Aug Sep Oct Nov Dec -2,1-2,2-2,9-2,8-1,9-3,5-3, CPI PPI Industrial Production 4 39, ,4 15,3,7 14,1 11,3 8,9 9,9 11, 5,3 4,9,3 4,7 -,5 1 2,7 2,9,3 2,4 2,4 2,4-2, -15,3 Export Import ,9 11,4 11,4,1,3 9, 9,5 9, 9,3 9,2 9,2 8,9

5 Monthly Key Economic Indicators 2 Growth rate in percent on y-o-y basis, expect PMI (index) Source: NBS Fixed Asset Investment Foreign Direct Investment ,5 2,9 2,2 2,1 2,4 2,4 2,2 2,5 2,7 2,7 2, ,3,5 -,2 Jan Feb Mar Apr -,7 May Jun Jul Aug Sep Oct Nov Dec -1,4 -,9-4,5-5,4 -,1 - -,8-8, Retail 15,2 15,2 14,7 14,5 14,1 14,2 14,2,8,7,1,2 Jan/Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Purchasing Manager Index* Manufacturing Official HSBC *official PMI focuses on larger corporations and SOEs, while HSBC s PMI focuses more on SMEs. An index above 5 indicates expansion, while an index below 5 indicates contraction.