“Promote growth” – China’s new slogan

China managed to control its inflation in 2011 as it successfully handled the porcine diseases that put high pressure on pork prices last summer, as well as implemented several restrictions on the real estate market (read more in Karine Hirn’s blog) and encouraged vegetable growth as well as water conservation projects to increase vegetable yields.

This year, growth is in focus, and the new slogan of the Chinese government is “Promote growth”. The major reasons for this are the tightening of the Chinese economy which has slowed the GDP growth in 2011, but also the softening of global demand.

Trade statistics were released earlier this week, showing that export growth was 13.4 percent in December compared with a year earlier, down from 13.8 percent in November. Import growth significantly decelerated to 11.8 percent, from 22.1 percent growth in November.

The weaker imports are mainly due to falling commodity prices, especially of iron ore and crude oil, while imported volume actually  increased. Lower imports are likely also a product of seasonal adjustments for the Chinese New Year holidays, which starts early this year, on January 22nd.

Yangshan Deep Water Port south of Shanghai ranks as the largest cargo port in the world.

The lower import figures made the Chinese trade surplus increase to USD 16.5 billion in December, compared to USD 14.5 billion in November. Totally, the trade surplus in 2011 ended at USD 155.1 billion. Even if the trade surplus is still huge, its trend is declining: in 2010 the trade surplus was USD 183 billion, to be compared with the record year 2008 when it was USD 295 billion.

In December 2011, China celebrated the tenth anniversary of its entry into the World Trade Organisation (WTO), and trade has since then increased almost five times. Today, China is the world’s largest exporter and the world’s second largest importer (after the US). Trade has been an important component of the economic growth in China during the last decade and in 2007, it accounted for 18 percent of the economic growth.

The global economic crisis in 2008/2009 hit China quite badly initially as its economic growth was so dependent on exports, and over 20 million migrant workers lost their jobs. Since then, the Chinese economy has shifted its dependency on exports. In 2011, it is the internal economic motor of China that appears to take over more of driving the economic growth.

Fixed asset investments are still high at almost 50 percent of GDP, and private consumption is increasing: for most of 2011, monthly retail sales have increased with around 17 percent year-on-year in urban areas. 2012 is seen by many analysts as the year when China will show its sincerity in shifting its economy from export-driven to consumption-driven, although transforming into an economy dominated by consumption like the American economy will take many years.

If exports would fall dramatically and cause a surge in unemployment similar to what happened in 2008 and 2009, it is probable that China will embark on a new stimulus package, although likely in a different shape than the massive stimulus package and credits of 2008/2009. That stimulus package, which accounted for totally RMB 9 trillion (or USD 1,32 trillion) including credits, was one reason for inflation pressure in 2011 and also increased local government debts. Instead, one could expect a smaller stimulus package, probably focusing on water conservation and social housing.

Until then, the Chinese government will continue its way to promote growth by selective easing including for example increasing required reserve ratios (RRR) at the banks and easing the current purchasing restrictions of the real estate markets.