Taipei should be wary of China’s economic twists and turns

Taipei should be wary of China’s economic twists and turns

Editorial

2014-02-10

As the Chinese Year of Horse begins, many anticipate a brighter economic outlook for Taiwan and China for the rest of the year, but official figures on China’s manufacturing and non-manufacturing indexes have shown declines, indicating the country’s economic transformation may have entered a difficult patch.

Taiwan’s economic development is closely linked to that of mainland China and Taipei should take the PMI indicators seriously to prevent mistakes and future financial issues.

In the manufacturing sector, China’s National Bureau of Statistics (NBS) reported that the country’s January purchasing managers index (PMI) was 50.5, while HSBC reported the figure at 49.5 — both figures showing a decline from a month earlier, with the HSBC’s estimate falling below the benchmark 50 level, indicating weakening foreign demand and slowing domestic business activities.

The NBS also unveiled the January non-manufacturing PMI at 53.4, lower than market anticipation and hitting a five-year low. This showed insufficient demand momentum especially as January is supposed to be a consumption peak ahead of the Chinese New Year holiday, concerning many over the outlook of domestic consumption this year.

Cai Jin, vice president of the China Federation of Logistics & Purchasing, said that Beijing’s anti-corruption drive has not only cooled down the consumption of luxury goods, but has also led to shrinking demand in the service industry, twisting the pricing trend.

Beijing has yet to show concerns over slowing economic growth, declaring that it will no longer use GDP stats as the sole indicator to evaluate its political or economic achievement. The Xi Jinping administration is now focusing its policies on resolving the problems of economic structural adjustments, planning to shake the economy’s dependence on exports and investments, and increase domestic consumption.

China’s economy grew 7.7% last year, the lowest level of growth in 14 years, failing to reach the projected benchmark of 8%. Nomura Securities projected that the country’s economic growth will trend lower this year, expecting GDP growth in the first quarter to slow to 7.5% and cool further to a new low of 7.1% in the second. Facing such a downtrend, Premier Li Keqiang has said that adjusting the economic structure must have a premise, that is, to create 10 million job opportunities. To reach such goals, Beijing will need to maintain minimum GDP growth of 7.2%.

In coastal provinces and major cities, Beijing needs to heavily implement economic transformation, focusing on transforming industries with overcapacity, but for those less developed regions, containing economic growth may mean that the industries cannot provide enough employment opportunities. For the latter, private consumption will likely be dampened and it will not be easy to end the dependence on exports and transform themselves into an economy focusing on domestic demand.

Beijing’s recent moves to crack down on corruption have won praise from the general public, but the PMI declines indicate private consumption has turned conservative. This shows the anti-corruption move is like a double-edged sword which may be able to combat corruption but will hurt spending at the same time. Observers are now waiting to see what kind of impact the deepened anti-corruption moves will have on the macro economy at a time when the government has focused on adjusting economic structure, stable growth and expanding domestic demand.

Since Deng Xiaoping kick-started the economic reform era in the late 1970s, the country has risen quickly and has provided Taiwan with a new market and opportunities. Taipei should now watch the situation closely so as to seek a winning strategy.