The International Monetary Fund has reduced its forecasts for
China's growth to 7.75% for this year. Speaking at a press
briefing in Beijing on Wednesday, first deputy manager of the IMF
David Lipton said the IMF was revising its initial forecast of 8%
downwards. This initial forecast was released in April along with
predictions for an 8.2% increase for 2014.
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The writing has been on the wall for some time now. Last week,
the "flash" HSBC Purchasing Manager's Index for May slumped to a
seven-month low. Not only did the figure come in below
expectations, this was the first time that the flash PMI index
declined below 50 since October. This is a matter of deep concern
for the nation, since a level below 50 indicates that the
manufacturing sector is contracting.
Though official PMI data is to be released tomorrow, there have
been several indications for some time now that the economy is
slowing down. The economy expanded by 7.7% in the first quarter,
falling behind the 7.9% recorded in the last quarter of 2012-13.
And now after the PMI numbers, leading investment bank economists
have also been forced to reduce their estimates. To add to the
gloom, the Organisation for Economic Co-operation and Development
has also reduced its growth estimates for China from 8.5% to
The "flash" PMI report caused substantial turmoil across
international markets. Most significantly affected was Japan, the
Nikkei dropping 7.3% to close at 14,483.98. It was only natural
felt the heat as well. The
iShares FTSE China 25 Index Fund
) dipped over 1% last Thursday. The ETF had fallen below its
50-day and 200-day simple moving averages as well.
The majority of China ETFs had started the year on a low note,
despite the fact that they are attractively valued. ETFs with
attractive valuations include the iShares FTSE China 25 Index
Fund and the
SPDR S&P China
). More focussed options in this segment include the
Guggenheim China Small-Cap
) and the
Guggenheim China Technology
). Both of them have turned in impressive performances, outpacing
the iShares FTSE China 25 Index.
The primary culprit seems to be slowing exports due to the
economic situation in Europe and the U.S. This is being
compounded by the lack of sufficient domestic demand, which was
cited as the OECD as the rationale behind reducing its estimates.
One of the reasons why domestic demand has declined is because
there is now an effort to reduce government spending in many
In fact, the IMF has said that China should make sustained
efforts to reduce its social financing. Total social financing
amounts to 7.9 trillion yuan ($1.27 trillion) for the first
quarter compared to around 4.9 trillion yuan for the same period
last year, which is a substantial increase. In April, the former
commerce minister said that the country's general government debt
had crossed the 30 trillion yuan mark, nearly $4.85 trillion.
Government debt has now increased to nearly 50% of GDP, though
the international lending agency feels that it is still under
control. Lipton said that the deficit was still manageable since
part of it was managed through land sales and "augmented" debt
was at manageable levels. Even so, it was necessary to bring down
the level of deficit over time so that deficit levels were
However, many market watchers believe that a lower level of
growth may not be a completely negative development. This could
give the country an opportunity to increase domestic demand in
order to decrease its dependence on exports. Additionally,
economic disparities have increased sharply, leading to fears of
possible social unrest.
In any case China has already adopted monetary policy as its
primary tool to spur on growth. Interest rates remain low, with
little chances of them going up in the future. However, the
country runs the risk of overheating the economy by giving rise
to asset bubbles. This is why the IMF has urged the nation to
aggressively pursue reforms. This could happen only through
further liberalisation of financial markets, leading to more
efficient allocation of resources.
President Xi Jinping has also spoken about the risk to the
country's environment due to unbridled growth. Urbanisation and
strident economic reforms are important steps which the nation
seeks to undertake. What direction the current dispensation
wishes to take will go a long way in determining the economic
future of the world's second largest economy.