Governmental measures to curb potential overheating in China

Chinas economy expanded 10.7% year-on-year in Q4 of 2009: the fastest increase since Q4 of 2007. For the whole of 2009, GDP grew by 8.7%, helped by a moderately loose monetary policy and the governments economic stimulus package rolled out since November 2008. Chinas stimulus programme has targeted mainly infrastructure construction, such as railway and road building and other public works, greatly benefiting the large state-owned enterprises.

In the first six months of 2009, China's banks lent out around US-$ 1.08 trillion [7.37 trillion yuan], almost double the loans provided in 2008, and, in total, a record US-$ 1.4 trillion [9.59 trillion yuan] was lent throughout 2009. This surge in lending fuelled China's rapid growth in 2009, but now it risks overheating the economy and an assets bubble, leading to a rise in inflation, and adding fuel to a real estate sector that is already overheated. The government is aware of these concerns and has already taken measures to manage rising inflation and to curb lending. The government plans to restrict credit supply to 7.5 trillion yuan in 2010.

The problem sectors in China remain export-oriented ones, such as textiles/clothing, toys, steel/metal, and shipbuilding. Exports of textiles and clothing declined 9.8% to US-$ 167 billion in 2009 due to sluggish demand in Chinas major export destinations [USA, EU and Japan] and increased quality and safety standards. Wages driven up by labour shortages and rising costs for energy and raw materials are eroding profits.

The steel/metals sector still faces declining export orders, falling prices, increased costs for iron ore and coking coal and serious overcapacity. The Chinese government has encouraged mergers and restructuring in the industry to improve economies of scale and overall competitiveness, and to put companies in a better position in negotiations for iron or supplies from key suppliers. Local government has been urged to close obsolete iron-making, steel-making and steel-rolling lines and prevent the revival of outdated capacities. Commercial banks have been asked to cut, by as much as half, loans to steelmakers who report obsolete capacities or who blindly expand production. In the Chinese shipbuilding industry, 65% of companies received no new orders last year while 30% of old orders were cancelled or delayed. The paper and printing industry suffers from squeezed profit margins because of rising raw material prices and threatened protectionism.

That said, domestic consumption has been impressive in 2009, with nominal retail sales growth increasing 17.5% year-on-year in December. To continuous to boost consumption, and offset the impact of a depressed export market, the Chinese government plans to increase pensions for retirees and raise the earnings of Chinas low- and middle-income population. It has also introduced favourable policies, such as home appliances replacement and home appliances to the countryside, preferential tax rates for vehicle purchases, a subsidy for agricultural machinery purchases and a beneficial policy for pharmaceutical areas.

Smaller private companies outperformed state-owned enterprises

As the economy has become more dependent on state-dominated investment, small and medium-sized enterprises [SMEs] in the private sector have continued to grow much faster than state-owned enterprises throughout the economic downturn. At least three factors contributed to this: more flexibility in response to the crisis; SMEs benefiting indirectly from contracts associated with the stimulus measure; and new policy initiatives ensuring that SMEs receive financial support through the banking system. Over the past 6 months Crédito y Caución has not seen any obvious increases in late payment.

In 2010, state-led investment will continue. However, to stave off excess liquidity and lessen the negative impact of overcapacity, China plans to redirect stimulus spending away from fixed-asset investment and into social services, such as healthcare and education.