Is China Over-Stretching?

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Is China Over-Stretching?
Is China Over-Stretching?

Is China Over-Stretching?

China has reported a stronger than expected sentiment figure in the services sector. The HSBC Purchasing Managers Index (PMI) for Services came in at 51.0, slightly ahead of the expected 50.7. This reassures that there is robustness present in the world’s second largest economy. The sentiment message is however mixed, weaker Manufacturing PMI data is dampening expectations for China. The manufacturing figure is typically a better indicator of economic conditions than the services figure, nowhere more so than in China.

The Chinese National People’s Congress has just announced the projected growth figures for the economy for 2014. This was more of a rubber stamping exercise, the figures were largely anticipated by analysts in advance of the legislative meeting.

GDP growth is targeted at 7.5%, no surprises there. This however is not an easy target to hit. China set the same target level in 2013 and just scraped in with actual growth of 7.6%, down from 7.7% in 2012 and sharply lower than the 9.3% posted in 2011. The Chinese economy has been slowing over the past few years, of that there is no doubt. The real question is the pace of the slowdown, based on sluggish data since the start of the year, many commentators are suggesting that China will face an uphill battle to meet the current 7.5% goal, also at risk is the 2011-2015 average growth rate of 7% project by the Chinese authorities.

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Additional targets set by the Chinese National People’s Congress include an inflation rate of 3.5%, this is unchanged from last year and is a much more achievable target than the growth goal. Importantly, this relatively high inflation rate will give the Chinese authorities some scope to introduce economic stimuli towards the end of the year should GDP growth look like falling short of target.

Impressively, the Chinese legislative has set a trade growth target of 7.5%. China is no slouch when it comes to foreign trade, and although ambitious the target would normally be achievable, particularly in light of the pick up in the global economy as a whole. The interesting challenge however is that China appears to be rowing back on it’s talk of depreciating the Yuan, the Chinese currency is artificially pegged by the Peoples Bank of China, a weakening may need to be encouraged later in the year in order to reach this trade growth target.

To contact the reporter of this story: James Brennan at james@forexminute.com