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Foreign media and organizations optimistic about Chinese economy

Updated: Oct 21,2015 9:43 AM

Recently, economists at Deutsche Bank said markets have got China all wrong. They forecast China’s GDP to grow at 7 percent for the third quarter, 7.2 percent for the fourth, and overall yearly growth to remain at 7 percent, which happens to coincide with the “around 7 percent” target Premier Li Keqiang had put forward. In the meantime, some foreign media and organizations also said the Chinese economy is still generating new drivers and the policy regulation and economic data are “under control”.

Following are some of the opinions:

Foreign media and experts optimistic about China’s economic prospects

BofA Merrill Lynch Fund Manager Survey for October finds that the number of investors who expect the Chinese economy to slow down has decreased from September. The Shanghai Composite Index has climbed 3 percent over the past month, lifting investors’ confidence in China.

The International Monetary Fund has left its China predictions unchanged at 6.8 percent for this year and 6.3 percent for 2016. The fund said the transition that the Chinese economy is undergoing, from an export-led growth to a model increasingly driven by consumption and services, is “essential”.

According to the Economist business weekly magazine, China has long pursued an industrial policy of “indigenous innovation”, and it is spending 2 percent of its GDP on R&D. And if China is becoming a lot more innovative, the private sector can take much of the credit.

Also, it said, China’s booming middle class is creating the world’s most dynamic consumer market and demanding better services.

According to the magazine, a study published by the Bank of Finland shows that Chinese investments in the EU went from almost nothing in 2004 to 14 billion euros ($18 billion) in 2014. Chinese firms tend to look for new markets and acquire brands, technologies and knowledge there.

French bank Credit Agricole said in its analysis that there was “no reason for panic” over the Chinese economy.

“While we acknowledge the difficulties of rebalancing the Chinese economy, our best case scenario sees a soft landing,” Credit Agricole said.

The bank said it was confident about China, first because the Chinese government still has ample leeway to support the economic momentum if required. Second, the services sector is doing much better than the manufacturing sector in China.

Credit Agricole pointed out that this did matter, considering the services sector currently accounts for almost 50 percent of China’s GDP.

Nicholas R. Lardy, a senior fellow at the Peterson Institute for International Economics, also said that China is not heading for a hard landing, and that services, not industry, are driving China’s growth.

Paul Sheard, chief global economist for Standard & Poor’s Rating Services, said that China must continue to reform its economy and “change the rules of the game to rebalance the economy from investment to consumption”.

According to Ian Bremmer, president of Eurasia Group, fears about the stability of China’s economy are exaggerated.

China is not headed for a “hard landing” anytime soon. The state’s ability to boost bank lending and invest large sums in important infrastructure projects across a broad range of strategically important economic sectors suggests that China will come close to this year’s growth target of “about 7 percent”, he wrote.

Economic data shows a dynamic economy

Economists at Deutsche Bank said some views on China such as the slowdown for growth in 2015 are mistaken.

The drop in August Caixin PMI, which is based on enterprises in the manufacturing industry, caused jitters in the market. But the number left out positive performances in local government financing vehicles (LGFV) - direct beneficiaries of fiscal stimulus - and property developers in recent months. Property and land sales, which contribute to government revenue, are expected to continue improving after China’s new policy about lowering the down payment on first home mortgages provided by commercial banks in cities that do not have housing purchase restrictions.

China’s September exports were significantly better than in neighboring South Korea, which weathered a sharp export drop in September, signaling that China is holding its own in a weak market, according to the Wall Street Journal.

Economists also told the Journal that China’s exports last month would probably have been stronger if not for an explosion at the northern port of Tianjin in August and the temporary closing of factories ahead of a September military parade in Beijing aimed at reducing air pollution.

ING economist Tim Condon said the strong September lending data is a good sign that fears in July and August over a sharp downturn in the Chinese economy were largely unjustified.

“This [credit data] sets us up for hopeful numbers next week,” Condon said. “At least we are not spiraling.”

Chinese government is not losing control over economic policies

“Handling margin financing is something new to the government,” said economists at Deutsche Bank. “But this does not mean the government is losing control over economic policies.”

Effects of a policy stimulus usually lag by one to two quarters, and significant fiscal policy easing started only in May this year. But there are signs of the stimulus starting to work - such as more funds being made available for investment from the state budget since June.

Deutsche Bank also says Beijing’s stance is against persistent depreciation. To appease global investors, the People’s Bank of China cut interest rates and required a rate of return (RRR) in August, to cushion the impact of a yuan devaluation.

“The PBOC will likely re-peg the RMB and keep it stable for the rest of the year,” it said.

Nor should the world be overly alarmed about China’s decision to devalue its currency, said Ian Bremmer of Eurasia Group.

The move wasn’t nearly large enough to significantly alter the balance of China’s trade with its largest partners, and the IMF has since offered praise for the move, because it brings the currency’s value into better alignment with market forces. In short, China’s economy is more stable than many realize, and its international influence will continue to expand.