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Lehman, Lee & Xu - China Capital Markets in the news

The China Law News keeps you on top of business, economic and political events in the China.
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In the News

China export growth close to stalling

China’s export growth almost stalled last month in a fresh sign the world’s second biggest economy is struggling to rebound in the second half.

Exports rose just 1 per cent last month from a year ago, down from 11.3 per cent in June and far less than expectations of 8.6 per cent. Imports rose 4.7 per cent, compared to 6.3 per cent in June, as China’s consumers failed to pick up the slack from weaker global demand. Analysts had been tipping a 7.2 per cent increase, according to a Reuters poll. The trade surplus was $US25.15 billion in July.

The latest set of data comes just one day after factory output, investment and retail sales fell short of expectations, prompting investors to bet that policy makers will step in to boost the economy.

Most economists are tipping another interest rate cut in the next few months and a reduction in the amount of capital banks are required to set aside.

China’s exports are being hit by falling demand from its two biggest customers, Europe and the US. Beijing said last month it was hoping growth in trade with emerging markets would allow it to meet its 10 per cent export growth target for this year. However, that is looking difficult based on the July performance.

Exports to Europe fell by 3.6 per cent, dragged down by big falls to markets including Italy, Germany and France. Trade with Australia and the US held up relatively well. Total value of exports to Australia rose 12.2 per cent and imports were up 11.3 per cent. China’s total imports of iron ore, by volume, rose 9.1 per cent but the value was down because prices were lower.

The poor trade news out of China follows similarly weak reports from Taiwan and South Korea in recent days.

If China’s economic data continues to disappoint, it may prompt the government to consider introducing an official stimulus package to bolster growth. So far, it has resisted fearing the bad debt and inflation problems that took hold after Beijing injected 4 trillion yuan into the economy during the global financial crisis.

On the positive side, inflation remains in check. The statistics bureau said consumer prices rose 1.8 per cent in July, the smallest increase in two and a half years. That gives the government plenty of room to ease monetary policy further.

JP Morgan is tipping one more interest rate cut this year and two or three further reductions in the reserve ratio requirement (RRR) for banks.

Web link: http://afr.com/p/world/china_export_growth_close_to_stalling_M3SaHlU6xrbNzbxqtZkewL

Scaling China's capital wall

In previous articles, I have noted that our economic relationship with China stands on only one leg.

In contrast to two-way trade – merchandise trade topped $120 billion in the year to June – the numbers for two-way investment are staggeringly low. In 2011, Chinese net investment in Australia amounted to $0.93 billion, a six-year low, and the Chinese share of the accumulated stock of foreign investment was just 0.94 per cent. The numbers are no more impressive in the opposite direction, with China only hosting 1.45 per cent of the accumulated stock of Australian investment abroad.

There are two proximate reasons for investment lagging trade so badly.

One is the special hurdle that Chinese investment appears to face when trying to pass the “national interest" test applied by our Foreign Investment Review Board. The shrill media commentary that even Chinese expressions of investment interest attract might also be regarded as an informal deterrent.

The other reason, which I would regard as being more important, is barriers to investment put in place by the Chinese side.

For example, while China has a relatively long history of being open to foreign direct investment (although not as open as Australia), foreign investors have, by and large, been barred from participating in China’s equity markets. Similarly, any investment abroad on a significant scale by Chinese entities has required the approval of the State Administration of Foreign Exchange.

While China’s capital account will not be liberalised overnight, there are signs that capital controls are being removed at an increasingly rapid rate.

A recent report by the Reserve Bank of Australia provides a comprehensive list of recent examples. To take just one: last month it was announced that foreign hedge funds, previously eschewed by the Chinese authorities, would be given permission to raise funds in China for investment abroad.

The implications for Australia of China liberalising its capital account are potentially profound, and certainly warrant far more discussion than the implications of China’s latest real GDP growth rate figure or the most recent interest rate decision by China’s central bank.

Given that the capital stock per person in China remains low relative to the traditional destinations of Australian investment abroad such as the US, economic theory suggests that the returns from additional investment should be high. Thus, Australian savers would be afforded an exciting new investment channel, which takes on even greater significance in view of the clouded medium-term prospects of most OECD economies.

The impact of Chinese investment in Australia is likely to be even more pronounced. The Australian economy is less than one-tenth the size of the Chinese economy when measured in purchasing power parity terms (around two-tenths when measured in US dollar terms). Over the past five years China’s current account surplus has averaged around 6 per cent of GDP, which, oil-exporting economies aside, is one of the highest levels in the world. This is significant because it is indicative of a positive gap between domestic savings and investment. Put differently, it identifies China as having a large quantity of savings that can be sent abroad.

Given our small population – and therefore our limited savings pool – Australia has long relied on foreign savings to boost the rate of investment. Greater access to China’s capital markets would facilitate a continuation of this mutually beneficially arrangement. Again, the emergence of China in this respect takes on extra significance in a global economic context where an inflow of savings from traditional sources cannot be taken for granted.

It would be particularly welcome in those sectors of the Australian economy that are capital intensive, such as mining.

As with most economic developments however, the news is not all rosy. A surge in Chinese investment, assuming it did not simply substitute for investment from other countries, would put further upward pressure on the Australian dollar, to the chagrin of other sectors such as manufacturing, tourism and education. In this sense, Chinese investment would accelerate the structural changes in our economy that Chinese demand for our exports of natural resources has already begun causing.

Finally, if an increase in Chinese investment is not matched by an increase in the domestic savings rate, our current account deficit will likely worsen. In the short run this reflects a basic national income accounting identify. In the longer run, the driver is rising outflows of factor income due to a larger stock of foreign capital in Australia. Whether or not this is a problem depends upon your viewpoint. Most academic economists are fairly unconcerned by current account deficits, at least in the context discussed above. The argument here is that if a current account deficit is being driven by strong investment interest from overseas, then far from being a sign of consuming beyond our means, it is indicative of confidence in the growth potential of the domestic economy.

Web link:


Edward Lehman 雷曼法学博士
Managing Director 董事长

LEHMAN, LEE & XU China Lawyers
Co-Founder with Russell Brown LehmanBrown International Accountants

Lehman, Lee & Xu is a top-tier Chinese law firm specializing in corporate, commercial, intellectual property, and labor and employment matters. For further information on any issue discussed in this edition of China Capital Markets In The News or for all other enquiries, please e-mail us at mail@lehmanlaw.com or visit our website at www.lehmanlaw.com and Mongolia www.lehmanlaw.mn.

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© Lehman, Lee & Xu 2012.
This document has been created for educational purposes for clients, potential clients and referrers of services to Lehman, Lee & Xu, and to alert readers to the services provided by Lehman, Lee & Xu. It is not intended to serve as definitive professional or legal advice, and should not be relied upon as such. Lehman, Lee & Xu does not endorse any personal opinions which may be contained herein.
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