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China: China Business Forecast 2012




China Business Forecast 2012

Core Views

With China's economy heading towards a hard landing, we believe it will become increasingly difficult for Beijing to statement strong headline expansion. While the headline GDP figure is as much of a political issue as an economic, a better focus on redistribution and rebalancing could be seen as a means to frame weaker headline increase. As such, we are nudging down our official increase forecasts across the board, marking an end to 8%+ expansion.

We expect to see amount measures of Chinese inflation recede in 2012, continuing the trend exhibited in H211. This should allow the People's Bank of China to cut interest rates twice, most likely in H112. We see consumer price inflation averaging 3.0% in 2012, from 5.6% in 2011, with outright deflation a critical possibility.

After a strong showing in both imports and exports in 2011, we believe that trade figures will start to decline in the coming months as a slowdown in domestic investment spending weighs on imports while a eurozone recession hits exports. The trade surplus, which came in at 2.2% of GDP in 2011, will fall only slightly to 2.1% of GDP in 2012, although rise slightly in nominal terms as cyclical and structural factures counterbalance each other.

Anecdotal evidence suggests there is a growing tendency part China's elite to shift their assets overseas as the economy faces the potential for a recession and political tensions rise. Findings from the 2011 Hurun Rich Inventory support this trend, which threatens to act as a major drag on the country's foreign reserves, potentially overwhelming the central bank's efforts to maintain currency stability.

Major Estimate Changes

We believe China will find it increasingly difficult to continue to statement 8%+ real GDP increase. Indeed, inclunding a genuinely sharp fall in increase potentially forcing the government's hand, rising social unrest may well tempt the government into focusing additional on redistribution and reducing inequality. We are pencilling in official headline real GDP increase to be reported at 7.5% in 2012, although we note that this would still not reflect the severity of the slowdown.

Key Risks To Outlook

The major downside risk to our economic outlook comes from another collapse in external request as was seen at the height of the world financial crisis. This would seriously undermine increase in trade-dependent industries and potentially hasten any fall in the property market, potentially leading to an outright recession. On the upside, the likely added determination on behalf of Beijing to want to prevent such an occurrence amid a change in leadership could force the government to throw amount its resources behind the economy to support increase, but this would likely come at the expense of next increase.

The major political risk comes from a rise in social unrest and a surge in public demonstrations against government corruption/ inflation/housing affordability, which could be triggered by overseas events or an economic slump. While we do not see the policy of the Communist Party of China as being at risk, such events would still have a detrimental impact on the business environment and could see the CPC strengthen its grip on the economy to the detriment of growth

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