Brief China Economic Update – 11 December 2013

Our expectations that China will achieve its growth target this year remain unchanged. Domestic demand has strengthened recently, with consumer confidence improving, while exports increased strongly during November – contributing to the widest trade surplus for four years.

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Our expectations that China will achieve its growth target this year remain unchanged. Domestic demand has strengthened recently, with consumer confidence improving, while exports increased strongly during November – contributing to the widest trade surplus for four years. These trends were tempered by a slight easing in industrial production and slowing investment.

China’s economy is expected to expand by 7.6% in 2013, but there are mixed signals for 2014. There is growing speculation that next year’s growth target will be cut to 7.0%, as the government seeks to commence reforms that will attempt to rebalance the economy. In contrast, our contacts in China report stronger levels of business confidence post the Third Plenum, which could support stronger than previously expected private investment and boost growth. Our forecast for 2014 is unchanged at 7¼%.

The first major reform following the Third Plenum was introduced this week, with the People’s Bank of China beginning the process of interest rate liberalisation. Financial institutions will soon be able to sell negotiable certificates of deposit, using the Shanghai Interbank Offered Rate as the reference rate. This move will likely increase the cost of funds for financial institutions but also provide more stability in their funding. It also signals a shift away from benchmark interest rates to market based mechanisms.

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