10 Guesses about China’s Macroeconomy in 2012

The year of 2012 has come. What will the Chinese macroeconomy be like is a hot topic. Experts have made ten relevant guesses, which are shown as follows:

New credit loans of 8 trillion yuan

The amount of newly lent credit loans will reach 8 trillion yuan (USD 1.26 trillion) in 2012. The increase of M2 will contribute to 2% of the GDP. Assuming that the GDP growth rate can be maintained at 8.5% and the growth of CPI is around 3.4% in 2012, the M2 will have a 14% increase. From that we can estimate that the amount of newly lent credit loans is about 8 trillion yuan.

The survey reveals that the enterprises still have a high demand for credit loans. Since the banking loans are limited by the quota management, the enterprises have to wait in turn to get the loans. Therefore many companies hope that the central bank can properly loosen the credit regulation and control. In December 2011 the central bank lowered the reserve requirement by 0.5 percent, hinting that the relevant departments may loosen the monetary policy. There are still spaces for the decrease of rreserve requirement and interest rate in 2012, so the credit market might be looser.

In addition, the regulatory department has implemented strict control over the loans for local financing platforms and real estate com- panies, leading to the decrease of gross credit amount in these two fields. In 2012, the project continuation capital and indemnificatory housing capital might be the breakthrough points of credit loans as the regulation over this field might not be that strict.

20% increase in imports and exports volume

In the first half of 2012, the imports and exports growth will continue to fall like this year. In the second half of 2012, the unfriendly factors for global economic growth will be gradually digested by the market and the global economy will return to the way of recovery. So the imports and exports growth rate will be up again at a fast pace. It is expected that the growth rate in the first half of 2012 is around 15% and 20%-25% in the second half of 2012. The average growth rate in the whole year is around 20%.

The foreign trade of China will face a more complicated domestic and international environment in 2012. New problems and challenges will arise and thus it is hard to keep the stable and fast growth of foreign trade. In the domestic market, local companies are to endure increasing operation cost in 2012; the regional shortage in labor force will become quite common and the salary increase cannot be reversed. In the international market, various economies intensify their contending for the global trade market and regional trade protectionism will rise. The major overseas economies might lack power of recovery. The European debt crisis might not be completely healed, leading to the continuation of disorder macro economic policies around the globe.

CPI up 3%-4%

Compared with two years ago, there are a lot positive advantages for keeping the prices stable next year. First of all, the downward economic climate index is good for depressing demandoriented inflation and the implementation of stable monetary policies deletes the monetary foundation of price increase. Secondly, the actualities in recent years show that international bulk commodities’ prices will not have obvious increase without the double push of loose fluidity and economic demand, which cannot be found in the current global economic situation. This means that the stress of imported inflation for China will be temporarily lower. Thirdly, presently there is sufficient supply of meat, grains and other important foodstuffs and the residential price is having a stable increase under the influence of real estate regulation and control. There is no strong force to push up the increase of commodity price.

Under the integrated influence of these factors, the increase of CPI will remain between 3% and 4% in 2012. The increasing labor cost and the reform to the resources like oil, gas and electric power may heighten the “basis” of inflation in China is higher than before. In the “12th FiveYear Plan” or a longer period, China still faces certain inflation risk unless deflation is caused by economic downturn.

Growth rate to the historical low

Influenced by the European debt crisis, the economic growth rate in China will be slowed. The year-on-year growth rate in 2012 will be estimated between 8% and 9%, the lowest point since 2002. But the investment structure changes, decreasing foreign trade surplus and booming consumption might further consolidate the sustainability of economic growth. A new round of economic growth is being gestated.

The economic growth in 2012 will be mainly driven by domestic demand. The investment into real estate, infrastructure construction and other fixed assets might see its growth slow in 2012, which will pull down the overall economic growth rate to some extent. Meanwhile, the manufacturing industry, especially the emerging industries, agricultural water conservancy and so on will have a fast increase. This is good for improving investment and economic structure. Generally speaking, the investment enthusiasm in different places will remain at a high level in the “12th Five-Year Plan” and there is a great space for the investment growth. The consumption will also rise stably. In 2011, the regulation and control over the real estate projects and the policies that limit the purchasing of vehicles has some negative influence upon the total retail amount, but the consumption potential is reserved. In 2012, the consumption growth rate will be faster than 2011 with the guidance of proper policies.

Decrease before Stability

The property control in 2012 will push the house price to a rational level. This means the rebound of house price is unlikely to happen. In the second half of 2012 the policies might have tiny changes in some areas. The government has already established the depression of speculation as a long-term mission in the real estate industry. Before the improvement of pilot projects of real estate tax and the completion of individual housing information, the restriction of housing purchasing in the major cities will not easily vanish. In 2012 the overall housing price in China will move back to a rational level.

Decrease might happen in the first half of 2012. Then, in the second half of the same year, a slight increase might happen with the tiny changes to policies, pushing the housing price to a stable level.

Reserve requirement drops three times

In the future, the monetary policies might be looser. If the inflation level in decreased, the interest rate is quite likely to decrease in 2012. The stress of decreasing interest rate will become bigger in the second quarter of 2012.

The most recent interest rate change period started from October 2010, when the CPI was 4.4%. The increase and decrease of interest all happened after the central made clear of the development trend of CPI. When the CPI went into a stable period, the central will wait and see till next round of fluctuation happens. In November 2011, the CPI increased by 4.2% compared November 2010, which is the lowest growth within the year of 2011. Therefore, there is a strong hint that the commodity price will drop in the future.

Starting in the second quarter of 2012, the central bank might be confronted with big stress of decreasing interest rate. The interest rate policy is not only related with CPI but also with the influence it might bring over investment, consumption, import and export. However, the decision about interest rate mainly aims at adjusting the interest rate to the same level with the return on investment. In 2012, the slowdown of economic growth will lead to the decrease of enterprises’ return on investment. In consideration of the corporate financing cost, which is dramatically increased by the macro adjustment and control, the central bank is more likely to decrease the interest rate if the financing cost is higher than the return on the enterprises’ invest- ment. On the other hand, the uncertainty of commodity price means that the basis for keeping the stability of CPI is not firm.

On November 30, 2011, the central bank declared the 0.5% decrease of the reserve requirement. But the large commercial bank’s reserve requirement still remained at the historical high level of 21%. In order to provide support for the fluidity of commercial banks, the central bank must lower the reserve requirement. It is anticipated that the central bank will drop the ratio three or four times in 2012 and the first drop might happen in January.

The Euro Zone forms a financial alliance

In 2011, the European debt crisis kept deteriorating and was spread to the whole world before becoming the biggest threat for the recovery of global economy. In 2012, Germany and France will lead a painful reform, causing the Euro Zone to become a zone with unified finance and integrated economy. During that process, the Euro Zone will be refined and become more effective.

The 26 members will form a government-level bond to enhance the financial discipline, which will highlight the development orientation for the Euro Zone. This is a significant progress that the Euro Zone gets and the best solution to the defect that haunts the Euro Zone for years. But the process will not go as easily as the article says. Actually, it’s more like a marathon, with a lot of unexpected difficulties. But the core members of the Euro Zone, especially Germany and France, will never waver in forming a financial alliance.

At most 3% appreciation of RMB

By the end of November 2011, the RMB had appreciated by 4%. But the appreciation rate will be neutralized in 2012 to be limited within 3%.

The narrowed trade surplus is an important inhibitor for the RMB appreciation. In 2012, the major economies have uncertain outlook in their economic recovery. The shrinking demand in developed countries will have some negative influence over the exports market of China.

In addition, the intensifying flow of crossboarder capital might bring some impact upon the RMB exchange rate. The European financial institutions have the demand for principal capital recruitment. This will cause depression stress for the currencies in emerging markets.

Though the economic growth rate in China will be eased in 2012, China is still the best place for global investment. The net inflow of capital will not be changed. Meanwhile, the Chinese exported commodities have strong competitive power and thus the economic surplus will still come out in 2012.

Monetary war will rise again

From 2010, when the global economy was recovering, the developed economies will purposely cause the “war of exchange rate”. In 2012, the European Central Bank is probably to implement the quantum loosening.

Europe will have slight recession under the influence of European debt crisis, forcing the European Central Bank to take measures to take more capital. Therefore, it will issue a great amount of currencies, initiating the exchange rate war.

It is worthwhile to mention that the economic growth rate of emerging economies is weakened thanks to the European debt crisis. Therefore, the war of exchange rate will not be as fierce as two years ago.