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Posted on April 11th, 2014, by

Hongbin (2012) believes that by reason of the specificities of its growth, China can easily afford itself to shift from the “cruising speed”¯ to “drift”¯ regime, which cannot, for example, be afforded by the euro zone countries, as it is an equivalent of recession for them. Nowadays, the refinancing rate of the People’s Bank of China makes 6%. It reached its minimum value in August 2010, when it dropped to 5.3%. The reduction of inflation down to 2.2% in June compared with 3% in May) will allow the central bank to further lower the discount rate (Teja et al., 2012). More “cheap”¯ money will stimulate the investment in infrastructure projects, such as construction activities, and according to Hongbin (2012), this will create more jobs and, as a consequence, stimulate domestic demand, the hot button for China.

Moreover, HSBC Global Asset Management believes that the slowdown in China’s economy is already stopping. According to Philip Poole, the major investment strategist at HSBC Global Asset Management, closer to the end of the year, the economic growth in China will accelerate significantly, and this will have a positive impact on the stock markets (cited in Hongbin, 2012). Analysts predict that China’s GDP growth would be in the region of 7.7% by the yearly result, and in 2013, it will be much higher than 8% (Hongbin, 2012). In general, according to the prime minister Wen Jiabao, the growth of the Chinese economy has started to stabilize, and the government is confident in achieving annual targets (The Guardian, 2012). Indeed, basing on September data, a number of economic parameters have showed improvement. Thus, the industrial production growth accelerated from 8.9 up to 9.2% in August, exports increased from 2.7 to 9.9%, and retail sales showed the growth from 13.2 to 14.2%. In the first nine months of the year, the investments in fixed assets increased by 20.5% compared to 20.3% shown in the first half of the year. On Shanghai stock exchanges, the general index has risen by 1.2%, while in Hong Kong the Hang Seng Index has grown by 0.7% (Laiyun, 2012).

Many experts, however, have perceived this improvement in figures with reserve. In addition, Koech and Wang (2012) mark that the Chinese government is peculiar with its political optimism, which is only raising concerns of other market participants. In particular, some analysts and investment banks (for example, Barclays Plc. and Mizuho Securities Co.) believe that China just overstates its actual results of the economic development, and in reality, they barely exceed 7%, and thus, despite the emerging signs of stabilization, the recovery process will be very slow (Koech and Wang, 2012; The Guardian, 2012; Zhou, 2012). Besides, given the fact that the export-oriented industries now providing the employment to 200 million people make a quarter of the Chinese GDP, the government is unlikely to succeed in maintaining the target level of the economic growth until the end of the year (Koech and Wang, 2012).

As a result, the IMF (2012) reported on the revision of the prognosis on the Chinese economy in China to worse. According to the IMF (2012), this year China will show the growth not by 8.5% or 8.25% as it was previously expected (down from 9.2% in 2011), but only by 7.8%, and next year, will strengthen not by 8.75%, but by 8.2%, though it will gradually be gaining momentum towards the end of 2012. Similarly, forecasts were also revised the Fitch rating agency, which considers that the slowdown in exports rates will turn to be a significant drag for the economic growth of China in the next two years, and the current account proficit is projected to stay at the level of 4.3% of GDP (Zhou, 2012). Further, JPMorgan Chase & Co predicts that in the long term, the growth rate of China will continue to decline, and will not exceed 6-8% in the next ten years (The Economist, 2012).

At the same time, the IMF (2012) report warns that if side risk of the financial instability further comes from Europe, it will drag the growth of China below all the forecasts. The report released in Beijing by the international lender warns that risks for China originating from Europe are large and notable already now (Gang, 2012). According to this forecast, China’s growth rate may get sharply dropped if the Eurozone continues to experience sharp recession. The spread of the financial crisis then will be felt mainly through trade, with direct consequences for the domestic demand.

According to experts, China’s closed capital flow account could provide some protection from the financial turmoil (Hongbin, 2012; Teja et al., 2012). Indeed, taking into account the uncertain perspectives of global development, some financial support for the Chinese economy may be justified. Thus, the IMF called the Chinese authorities for postponing their plans to consolidate the budget and for determining the target of the state budget deficit at 2% of GDP in 2012, responding to the slowdown by the significant package of tax-budget measures that should be implemented through the central and local governments, but not through the banking system (The IMF, 2012).

In his interviews, the General Secretary of the Communist Party of China Hu Jintao states his believe that the pressure of the negative factors can be offset through the increase of investments in the infrastructure projects as well as through the proactive fiscal policy. In particular, to encourage banks to the more active lending to clients, over the past few months the China’s central bank has lowered the requirements to the volume of bank reserves by almost 3 times (The Guardian, 2012; Gang, 2012). Since June 2012, People’s Bank of China discount rate has been reduced by half, which helped somehow reduce the loan debt burden on private business (Gang, 2012). The most important thing here is to prevent the bankruptcy of enterprises associated with high credit loads. If the economic growth rate is lower than the interest rate, there is a danger of enterprises’ bankruptcy, but on the other hand, the payments may be postponed until the period when the economy starts rising. The Chinese banks, which are predominantly state-owned banks, have the ability to prolong loans on terms that companies receive the money, but the payment of interest is shifted into the future. As a result, the volume of allocated loans increased by 20 billion dollars in June compared to May figures (Gang, 2012).

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