China, the world’s second largest economy, saw a decline in both imports and exports between October and December with a GDP growth of 8.7 percent, which is down a full percentage point from the first quarter. Investors were mostly surprised at the slump of import growth that sunk to a 26 month low of just 11.8 percent year-on-year versus the 17 percent figure economists predicted in a Reuters poll. Exports remained on par with expectations, although the 13.4 percent recorded in December is the slowest since November 2009.
“The main disappointment is with imports, which show a much weaker number compared to November and are way below consensus,” said Kevin Lai, an economist at Daiwa Capital Markets, in Hong Kong. “That means the boost in November was temporary, the domestic economy is slowing sharply. China will have to continue to relax policy to protect domestic demand.”
In China, exporters account for about 7 percent of the GDP. The Government had planned to rebalance the economy towards more internal demand and consumer imports, turning away from exports, but this data complicates these plans. However, it does help China argue that it is reforming its currency policy which has long been criticized by foreign countries who insist the Yuan’s artificially low value gives exporters an unfair competitive advantage. Recent reports indicate that Beijing has been adding cash to the financial system to ease credit strains and stimulate the economy. The Yuan gained about 4.5 percent against the dollar in 2011. Financial markets reacted positively to the data hoping monetary relaxation would offset the fear of slowing growth.
A December Reuters poll indicated analysts were in favor of China lowering its lower banks’ reserve requirement by another 200 basis points in 2012 after it lowered requirements by 50 basis points in November for the first time in three years. The poll also showed a belief that a cut in interest rates would only occur if the economic growth slipped below 8 percent. If China is to create enough jobs to keep its unemployment rate low, it must grow the economy by about 8 percent. China does not release unemployment numbers, but in urban areas the rate has stayed around 4.1 to 4.3 since 2009.
“Half of China’s export markets are slowing in the first half of the year so that’s why expectations for growth remain downbeat,” said Li Wei, an economist at Standard Chartered, in Shanghai. “It’s not the end of the slowing down part of the story. That will probably last another quarter or four or five months before momentum recovers along with other emerging markets.”
Economists report that even with seasonal factors like an early Lunar New Year and steady exports, China will have a tough couple of months ahead.
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