With the US in recession, global economic growth is ever more reliant on China. But, with inflation racing ahead, Chinese authorities must adopt new strategies to contain the political and economic consequences. With China now exporting inflation globally via higher export prices, all businesses, whether directly trading or investing in China or not, will be affected by China’s performance in 2008/09 and beyond.

China’s Magic Bullet: Can A Yuan Revaluation Restore Economic and Social Stability? evaluates the key risks to stability posed by unbalanced economic growth. In particular, we focus on the impact of inflation, which has risen from 2.8% in 2006 to 8.7% in February this year. This is stoking rising unrest in both urban and rural areas. Our principal political concern is that economic losers among the ethnic Han will copy the tactics of those in Tibet and, alongside other disgruntled minorities – including Uighur Muslims, Falong Gong supporters and democracy activists – use the Olympics to challenge the government more openly.

The authorities are aware of the political dangers, and concerns about stability remain at the heart of economic policy-making. Importantly, BMI’s analysts believe that, with double-digit economic growth required to contain unemployment, the authorities will pursue a cautious approach to currency appreciation. We present the results of our econometrically-modelled scenario test of a 10%, 15% and 20% revaluation of the yuan. With a large revaluation likely to trigger deflation and a slump in growth below 5%, we believe that caution will prevail. This will minimise, but, will not eliminate either economic or political risks (See below for further extracts from the Report).

Extracts from China’s Magic Bullet: Can A Yuan Revaluation Restore Economic and Social Stability?

Inflation expectations have become entrenched - BMI believes that China has now reached a tipping point, beyond which it will become difficult to convince consumers and investors that inflation will recede. 2008 is a crucial year. Modest currency appreciation will not substantially curtail inflation and, with most now believing that the government wishes to maintain economic growth substantially beyond its official target of 8%, there is a real danger that inflation will continue to climb.

But monetary policy risks a Chinese credit crunch – In order to combat inflation, credit growth targets have been released. But in January, credit equivalent to 22% of the entire loan quota for 2008 was released. If this data is confirmed, and if the government is serious about enforcing its guidelines, it increases the likelihood of a substantial liquidity squeeze towards the end of the year. If this transpires, the number of non-performing loans – a key side effect of loose lending practices – would escalate as broader economic growth falters. Thus, while the attention of banking analysts are turned towards the US and Europe, the risks of a Chinese-style banking crisis are steadily, but consistently, rising.

The yuan will appreciate by 9% this year – Amid uncertainty about monetary policy, the government will almost certainly allow the yuan to appreciate this year. We believe that a gradual 9% rise is the most likely scenario, but we have run a one-off 10%, 15% and 20% revaluation through our econometric model. We believe that the authorities actions are constrained and that the effects on inflation and growth mean that a 10% adjustment is the maximum that the authorities will allow.

Tibet highlights political risks – International attention is focused on Tibet. However, while a concern – not least as it provides the state’s access to Western Eurasia – the perfect storm for the authorities would be a simultaneous challenge from Tibetans, Uighur Muslims, Falun Gong supporters and democrats. In an Olympic year, the authorities will move rapidly to quell dissent, but this risks a heavy-handed public security display and an overly-cautious economy policy.

CONTENTS

China's Magic Bullet: Can A Yuan Revaluation Restore Economic and Social Stability?

Olympic Year, Olympian Challenges

  • Is Tibet The Tip Of The Iceberg?
  • Arresting An Inflationary Spiral
  • Everything’s Not Lost

Domestic Politics

  • Unrest In The Periphery Could Spread Inward
    • Tibet Unrest Aims To Demonise Beijing Ahead Of Olympics
    • Main Risk Is That Violence Could Spread To Other Minorities
    • Why Tibet And Xinjiang Matter
    • Scale Of Unrest Raises Questions About Control
    • Biggest Risk is Broader Public Unrest

Foreign Policy

  • Cross-Strait Improvement To Be Gradual
    • High Expectations Likely To Be Tempered
    • Chart: No Man Is An Island
    • Taiwan - Overseas Investment (US$mn) 3-mma
    • Military Build-Up To Impair Political Relations
    • Piece Agreement Within Reach
    • DPP To Lick Its Wounds With 2012 In Sight
  • Xiamen To Benefit From Cross-Thaw
    • Factors Boosting Xiamen’s Position
    • Potential Risks
    • Chart: Waiting For The Breakthrough
    • Xiamen And Its Environs

Economic Activity

  • GDP Data Highlights External/Domestic Trade Off
    • Chart: Showing Signs Of Moderating
    • Real GDP (Change % y-o-y)
    • Focus Still On Inflation
    • Chart: Further Tightening Required
    • Consumer Price Inflation (% change y-o-y) & Producer Price Inflation (% change y-o-y)
  • What Does Slower Global Growth Mean For Exports?
    • Chart: An Ominous Correlation?
    • Baltic Dry Index and Shanghai Composite Index
    • Table: China - Balance Of Payments
    • Period 2003-2012, exports (us$bn), imports (us$bn), trade balance (us$bn), current account (us$bn),
      current account (% of gdp), forex reserves (- gold, us$bn), import cover (months g&s), opec basket (us$/b, ave)
  • Demographics Point To Mounting Woes
    • Ageing Society Could Limit Dynamism
    • Middle Class Could Be Squeezed Out
    • Gender Imbalance Could Create Instability
    • Chart: Working Age Population Will Peak Soon
    • China - Population Aged 15-64 (Medium Variant)
    • Whither The One Child Policy?
    • China As A Magnet For Immigrants?
    • Chart: Current Structure Will Not Last
    • China - Population Structure, 2005
    • Chart: Too Few Babies These Days
    • China - Total Fertility Rate (Medium variant 1950-2050)
    • Can Automation Provide A Solution?
    • Is Financial Reform The Solution?
    • Chart: A Grey Future Awaits
    • China - Population Structure, 2050
    • Conclusion: No Quick Solutions

Monetary Policy

  • A Trap Of Their Own Making: What Next For Monetary Policy?
    • Chart: Positive Carry Tempting Prospect
    • Spread Of One-Year PBoC Bill Yield Over One-Year US$
    • Hot Money: Is It A Problem?
    • Bank Lending: Government Efforts Having Little Effect
    • Core Inflation: What Is It Telling Us?
    • Chart: Steadily Ticking Higher
    • Non-Food Inflation, % change y-o-y
    • How To Curb Money Supply Growth?
    • Chart: Government Warnings Go Unheeded
    • New Loans, CNYbn (LHS)
    • Policymakers Face Constraints
    • Chart: Few Signs Of Slowing
    • Total Loan Growth (% chg y-o-y)

Exchange Rate

  • Will 9% Appreciation In 2008 Be Enough?
    • Chart: Picking Up The Pace
    • Exchange Rate, CNY/US$
    • Our Current Core Scenario
    • Chart: Danger Of Tightening Too Far
    • Inflation Scenarios (% chg y-o-y)
    • Revaluation Scenarios Revisited
    • Chart: Little Short-Term Relief For Mounting Trade Surplus
    • Trade Balance Scenarios (US$bn)
    • Chart: Stability Remains Overriding Objective
    • Growth Scenarios (% chg y-o-y)
    • Conclusion: Status Quo To Remain...For Now
  • Greater TWD/CNY Convertibility On The Cards
    • Chart: Unlocking The Door
    • Taiwan - Exchange Rate, TWD/CNY
    • The Kinmen And Matsu Conversion Windows
    • Convertibility Beneficial To Cross-Strait Businesses
    • What Next?

Business Environment

  • Introduction
    • Latest Developments
    • TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
    • Afghanistan, Bangladesh, Bhutan, Cambodia, China, East Timor, Hong Kong, India, Indonesia, Japan,
      Laos, Malaysia, Maldives, Myanmar, Nepal, North Korea, Pakistan, Philippines, Singapore, South
      Korea, Sri Lanka, Taiwan, Thailand, Vietnam, Australia, New Zealand, Global Ave, Regional Ave
  • Institutions
    • Legal Frameworks
    • Property Rights
    • Intellectual Property Rights
    • Corruption
    • TABLE: BMI LEGAL FRAMEWORK RATINGS
    • Afghanistan, Bangladesh, Bhutan, Cambodia, China, East Timor, Hong Kong, India, Indonesia, Japan,
      Laos, Malaysia, Maldives, Myanmar, Nepal, North Korea, Pakistan, Philippines, Singapore, South
      Korea, Sri Lanka, Taiwan, Thailand, Vietnam, Australia, New Zealand, Global Ave, Regional Ave
  • Infrastructure
    • Physical Infrastructure
    • Labour Force
    • TABLE: ASIA POWER CONSUMPTION
    • Period 2007-2011, consumption (twh), China, Hong Kong, India, Indonesia, Malaysia, Pakistan,
      Philippines, Singapore, South Korea, Taiwan, Thailand, Consumption Growth (% y-o-y), China,
      Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan, Thailand
  • Market Orientation
    • Foreign Investment Policy
    • TABLE: DEMOGRAPHIC INDICATORS (2005)
    • Period 2000-2030, dependent population (% of total), dependent population (total), active
      population (% of total), active population (total), youth population (% of total), youth population
      (total), pensionable population (% of total), pensionable population (total)
    • TABLE: LABOUR FORCE QUALITY
    • Afghanistan, Bangladesh, Bhutan, Cambodia, China, East Timor, Hong Kong, India, Indonesia, Japan,
      Laos, Malaysia, Maldives, Myanmar, Nepal, North Korea, Pakistan, Philippines, Singapore, South
      Korea, Sri Lanka, Taiwan, Thailand, Vietnam, Australia, New Zealand
    • Foreign Trade Regime
    • TABLE: ASIA, FDI INFLOWS
    • Period 2005-2006), Australia, China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines,
      Singapore, South Korea, Sri Lanka, Taiwan, Thailand, Vietnam
    • TABLE: CHINA, ANNUAL FDI INFLOWS
    • Period 2000-2006, inward FDI (US$bn), -% chnge y-o-y, -FDI as % of GDP, - FDIper capita (US$)
    • TABLE: BMI TRADE RATINGS
    • Afghanistan, Bangladesh, Bhutan, Cambodia, China, East Timor, Hong Kong, India, Indonesia, Japan,
      Laos, Malaysia, Maldives, Myanmar, Nepal, North Korea, Pakistan, Philippines, Singapore, South
      Korea, Sri Lanka, Taiwan, Thailand, Vietnam, Australia, New Zealand
    • Tax Regime
    • TABLE: TOP EXPORT DESTINATIONS
    • Period 2000-2004, US, Hong Kong, Japan, South Korea, Germany, total exports, top 5 (% of total)
  • Operational Risk
    • Period 2000-2004, US, Hong Kong, Japan, South Korea, Germany, total exports, top 5 (% of total)

Key Benefits of the Report

  • Identify and evaluate the scale of growth opportunities in this key global market, where early involvement is the key to strategic success
  • Identify key risks to your business and investment plans using BMI’s proprietary Political and Economic Risk Ratings system
  • Benchmark your own views and forecasts for market performance against BMI’s independent 5-year industry forecasts
  • Use BMI’s country-comparative business environment ratings to assess the operating risks, opportunities and key factors impacting corporate profitability

We believe this Report is required reading for the following senior executives in your business:

  • Strategists– Gain an insight into the commercial opportunities available in China, using our clearly-explained medium-term economic forecasts (2008-2012) to benchmark your own growth projections.
  • Risk Managers– Discover the key Political, Economic and Operational risks facing companies in this rapidly developing market, and exploit BMI’s quantitatively-based risk assessment model to stress-test your own assumptions.
  • Country Managers- Gain an insight into the broader risks that will impact upon your clients and competitors profitability.
  • Financial Planners– Critically evaluate the assumptions underpinning your medium-term financial projections using BMI’s growth projections for the future direction and value of the currency and key domestic interest rates; the principal determinant of business investment and consumer spending growth.

 

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