JEDDAH – Risks of a hard landing in China are lower than at the start of the year, Kuwait-based Asiya Investments, said in a new report. The Chinese government has been implementing structural reforms since last year, causing a broad-based economic slowdown. The adjustments are still ongoing and it will take some time before they have a positive impact on the economy. These include the consolidation of industries that are experiencing large excess capacity, a crackdown on corruption, predominant among high level officials, financial liberalization and regulation of a growing non-official financial sector, among other reforms. In the first few months of this year, there were concerns that the government would not be able to manage the slowdown, increasing expectations of a sharper decline in economic growth. So far, the Chinese economy eased, but without causing any major instability. In the first quarter of 2014, China's real gross domestic product (GDP) decelerated to 7.4 percent year-on-year, from 7.7 percent YoY in the last quarter of 2013 and for the entire year. However, the slowdown was widely expected by analysts, with a consensus forecast of 7.3 percent YoY. Most sectors witnessed a decline in growth, but it was mostly evident in the in investments, specifically in infrastructure and property. By not intervening through large-scale infrastructure stimuli in the first quarter, the government showed implementing structural reforms was still its top priority. However, in order to soften the impact of reforms on the economy, the government injected small doses of liquidity targeted at specific sectors, in the form of mini-stimulus packages and looser monetary policy for a specific range of banks, such as those focused on the rural sector and smaller businesses. The effect is now evident. Industrial output growth picked up in May after reaching its lowest point since the global financial crisis in April. Industrial output had also been decelerating in each of the last six months before May. Infrastructure investments also grew to a 9-month high of 28 percent YoY in May, supporting overall fixed asset investments. While the government's light interventions are good for short-term growth, it means that painful structural reforms may take longer to be implemented than initially anticipated. Meanwhile, the consumer and official financial sectors have been fairly stable throughout the year. The latest update on the state of the economy came last week with the release of HSBC's preliminary estimate (flash) of the manufacturing sector's purchasing managers' index (PMI), a diffusion indicator reflecting purchasing executives' views on business conditions. A reading above 50 would indicate a higher number of respondents reporting "better conditions" than "worse conditions", hence an expansionary business environment. China's National Bureau of Statistics (NBS) and HSBC both publish PMI figures monthly, for both the manufacturing and non-manufacturing sectors. According to the flash HSBC manufacturing PMI, China's manufacturing sector most likely expanded for the first time this year in June after the index jumped from 49.4 in May to 50.8. The expansion was due to higher demand, both domestically and externally, driving output higher. — SG
