Deflation fears grow in China

Producer price index sinks most in 6 years

A customer selects vegetable at a supermarket in Hangzhou, Zhejiang province yesterday. The consumer price index (CPI) rose 2% in August from a year earlier, due largely to soaring food prices, not an improvement in economic activity. (Reuters photo)

BEIJING: China’s manufacturers slashed prices at the fastest rate in six years in August as commodity prices fell and demand cooled, signalling stubborn deflation risks in the economy and adding to expectations for further stimulus measures.

The producer price index (PPI) fell 5.9% in August from the same period last year, its 42nd consecutive month of decline and the biggest drop since the depths of the global financial crisis in late 2009, data showed yesterday.

The market had expected a decline of 5.5% after a drop of 5.4% in July.

“The change in PPI is very worrying. It could affect corporate profitability, which in turn could affect consumption and the economy,” said Li Huiyong, economist at Shenyin & Wanguo Securities. “We must step up policy support.”

Economists believe that China’s surprise currency devaluation of nearly 2% in mid-August will have little impact on inflation in the near term, in comparison with the effect of sharply lower commodity prices.

The consumer price index (CPI) rose 2% from a year earlier to a one-year high, the National Bureau of Statistics said, but the gain was due largely to soaring food prices, not an improvement in economic activity.

Analysts polled by Reuters had predicted CPI would rise 1.8%, compared with 1.6% posted the prior month.

Indeed, non-food inflation remained subdued at 1.1%, unchanged from July.

“The risk for China is still deflation, not inflation. PPI deflation will eventually filter down to affect CPI, and aggregate demand will continue to be weak,” said Kevin Lai, chief economist Asia Ex-Japan at Daiwa Capital Markets Hong Kong Limited, adding that his firm had just cut its 2016 CPI forecast to -0.5% from 0.5%.

“In addition all the capital outflows (due to the slowing economy) will force the PBOC to continue purchasing yuan, which is hugely destructive to the monetary base,” he said.

Continuously falling producer prices are eating into profits at many Chinese firms and raising the relative burden of their debts.

Official and private factory surveys last week also showed manufacturers laid off workers at a faster rate last month as their order books shrank. 

The central bank has cut interest rates five times since November and more reductions are expected in coming months, but many economists believe real rates are still too high, discouraging new investment.

Economists at ANZ said further policy easing is needed soon to head off the risk of a vicious cycle of slower growth and deflation.

They expect the People’s Bank of China to cut banks’ reserve requirements (RRR) by another 50 basis points by year-end.

Data earlier this week showed imports tumbled more than expected in August while exports shrank again, pointing to persistently weak demand both at home and abroad.

Other data from China this week — including industrial output and investment on Sunday — are likely to be downbeat, keeping financial markets on edge.

Fears of a China-led global slowdown have grown in recent weeks after a series of grim factory activity surveys.

The government is also still struggling to stabilise the yuan after its surprise devaluation of the currency on Aug 11 and halt a stock market rout that has seen the country’s share indexes plunge 40% since mid-June.

Analysts say weak data over the summer is putting Beijing’s official 7% growth target for this year at risk.

That level would mark China’s weakest expansion in a quarter of a century, but some economists believe current growth levels are already much weaker than official numbers suggest.

The chairman of the National Development and Reform Commission (NDRC) said on Wednesday that China’s economic fundamentals “are healthy while still facing relatively large downward pressure.”

Separately, the Finance Ministry said on Tuesday that it would strengthen fiscal policy, boost infrastructure spending and speed up reforms to support the economy.

Source:  Reuters  September 11, 2015

TOM’S COMMENTS:  If you’re global sourcing out of China, time to renegotiate pricing.  If you’re sourcing strategy is mostly China-centric, then move quickly to spread your risks to other Asian countries. 

Let Nova Advisors help you:

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Indonesia unveils stimulus to bolster economy, currency

JAKARTA – Indonesian President Joko Widodo on Wednesday unveiled a series of stimulus measures to lift slowing growth in Southeast Asia’s top economy and shore up the country’s plunging currency.

President Joko Widodo unveils a series of stimulus measures at the presidential palace in Jakarta on Sept 9, 2015.

In a televised address, Widodo was joined by key policymakers to announce a broad range of measures including the slashing of red tape to woo investors, moves to bolster the rupiah, and programmes to help the poor.

The president said the stimulus was aimed at providing an “economic jump forward”, and that two other parts of the package would be unveiled in the coming weeks.

Widodo came to power last year pledging to boost the G20 economy but his government has faced criticism for a series of policy flip-flops, sending mixed messages to investors and a failure to get key initiatives off the ground.

In a bid to cut through red tape, the president said Wednesday that adjustments were being made to 89 regulations to simplify doing business and cut “irrelevant regulations which have hampered the competitiveness of national industry”.

Policies announced to help the poor included the provision of cheaper fuel to fishermen, more funding to villages and the strengthening of a programme to provide cheap rice.

Agus Martowardojo, governor of the central bank, Bank Indonesia, announced measures to help the rupiah, including improving the management of foreign exchange flows.

Other steps unveiled in the package included helping exporters with financing and making it easier for frequent foreign visitors to Indonesia to open bank accounts.

Widodo had pledged to kickstart growth by creating new jobs for the young, starting a flurry of infrastructure projects and boosting the manufacturing sector.

But growth has continued to slide, hitting a six-year low of 4.7% in the second quarter, while the rupiah has fallen to a 17-year low in recent months. On Wednesday, the unit was changing hands at 14,250 to the dollar.

Like other emerging markets, Indonesia has also been hit by external factors, such as expectations that the US will soon raise interest rates and China’s devaluation of its currency.

Widodo had already taken some steps to boost confidence in his economic management. Earlier this month, he announced tax breaks for some industries and in August he replaced key economic ministers in a cabinet reshuffle.

TOM’S COMMENTS:  Look for similar programs surging through ASEAN and specifically GMS corridor countries.  Programs will include populist programs to boost spend and initiatives to hand currency fluctuations.  Benchmark goals and forecasts will be rarely provided with the announcements of initiatives.

Source:  Bangkok Post | September 10, 2015

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China to invest $900b in Belt and Road Initiative

China announces plans to boost the Belt and Road trade by creating economic corridors and investing nearly $900 billion in countries along the route.

Vice-Premier Zhang Gaoli said the country is mulling six economic corridors with countries along the Belt and Road trade route to better connect Asia and Europe with funding from the Asian Infrastructure Investment Bank and the Silk Road Fund.

Corridors are set to run through China-Mongolia-Russia, New Eurasian Land Bridge, China-Central and West Asia, China-Indo-China Peninsula, China-Pakistan, and Bangladesh-China-India-Myanmar, said Zhang.

Addressing the opening ceremony of the Asia-Europe Meeting (ASEM) Industry Dialogue on Connectivity Chongqing municipality on Wednesday, Zhang said such strong relationships were “a trend of the times and a global concern”.

The China-proposed Belt and Road Initiative on trade and infrastructure networks have been welcomed across Asia and Europe, according to Zhang. Its success is in the interests of all the sides involved, he said.

Meanwhile, China Development Bank, one of the country’s policy banks, said it will invest more than $890 billion into more than 900 projects involving 60 countries, as part of its efforts to bolster the initiative, the 21st Century Business Herald reported on Thursday.

The newspaper cited the bank’s vice-president Li Jiping that over $10 billion has been poured into projects covering coal and gas, mining, electricity, telecommunications, infrastructure, agriculture, and so on.

Zhang underlined that “connectivity” concerns not only physical infrastructure like roads, but also people-to-people exchanges, policy coordination, trade and capital flow, a significant boost to Asia-Europe cooperation.

While highlighting transportation, communication and energy as important areas for connectivity, the vice-premier said the countries should “consolidate the social foundation for connectivity” by ensuring openness in their education, employment and tourism markets.

The two-day event held in Chongqing municipality has gathered government officials and company representatives from the 53 members and international organizations grouped under the ASEM.





Source : China Daily | May 28, 2015

Thomas D’Innocenzi

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China-EU co-op to help China’s fast growing digital economy


The director general of BusinessEurope said in a recent interview with Xinhua that China-EU cooperation can help realize growth potential in China’s digital economy.

Markus J Beyrer, director general of BusinessEurope, an association of enterprises in 33 European countries, said the digital industry is a game changer for the global economy and will have a huge impact on EU competitiveness.

Intelligent, interconnected systems now seamlessly support industrial activities along the entire value chain, he added.

Europe will have to reap the benefits of this huge potential, putting in place a real strategy to digitize all sectors of the economy.

He noted that by 2025, Europe’s manufacturing industry would gain a gross value worth 1.25 trillion euros ($1.36 trillion). However, he warned if Europe fail to turn the digital transformation to their advantage, the potential losses can be up to 600 billion euros by 2025 or over 10 percent of Europe’s industrial base.

Talking about China’s digital economy, Beyrer said China’s Internet industry is growing fast, but until now it has largely been consumer-driven rather than enterprise-driven.

Large e-commerce firms have driven sales and transformed retailing, but small and medium sized enterprises still lag behind in using the Internet for procurement, sales and marketing purposes, he said.

“It is clear that there is a lot of potential for growth in China’s digital economy too, China needs to liberalize its market to encourage new innovations and robust competition would accelerate China’s productivity,” said Beyrer.

Beyrer underlined that European companies have the required expertise and can help China realize its potential by engaging the Chinese market on commercial terms.


Source : China Daily | May 27, 2015

Thomas D’Innocenzi

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Dubai eyes key role in trade initiatives


Emirate wants to be China’s partner as ‘Belt & Road Initiative’ takes shape

Dubai is set to play an important role as the trade, transportation and financial hub for China in the Middle East and Africa as well as be a key partner for the “Belt and Road Initiative”.

A high-level delegation of government and business leaders from Dubai is currently in Beijing for the Dubai Week in China from May 9 to 15 and will use the event to showcase the emirate’s ties with China and opportunities for future growth.

Ibrahim Al Janahi, deputy chief executive officer of the Jebel Ali Free Zone Authority and chief commercial officer of Economic Zones World, told China Daily: “Dubai, with its transportation, financial and legal infrastructure, can act as the gateway for Chinese businesses in the Middle East and the African continent.”

JAFZA, which hosts 248 registered Chinese companies, is continuing to have discussions with several others to join the zone and many are in the pipeline for this year, said Al Janahi.

“In particular, we will adopt strategies to help more small and medium-sized Chinese enterprises, which are limited in capacity, to enter the region going forward,” he said.

In 2014, China overtook India as Dubai’s biggest trading partner with traffic between the two surging 29 percent to $47.6 billion. Much of the Chinese trade into Dubai enters via Middle East’s largest port, Jebel Ali, and is destined for re-export elsewhere in the region and beyond. The Silk Road Economic Belt and the 21st Century Maritime Silk Road initiatives proposed by President Xi Jinping have emphasized an important role for trade facilitation and connectivity.

Dubai already plays such a vital role for the region, and is well positioned to further its role in line with the “Belt and Road Initiative”, said Cong Hongbin, managing director of Invest Dubai, a subsidiary of the Dubai-based advisory firm Falcon and Associates.

Aside from its maritime infrastructure, Dubai International Airport surpassed Heathrow last year as the world’s busiest airport for international passenger business.

Emirates Group, one of the main carriers in the Middle East, which is well-known for its luxury first-class cabins and services, also witnessed stronger relationships and personnel exchanges between the two sides.

Since the carrier started to operate in China in 2004, travel and trade exchanges between the two have increased 10 fold, said Barry Brown, Emirates Group divisional senior vice-president of commercial operations.

As many as 1.3 million Chinese passengers traveled by Emirates in the last financial year, Brown said. The carrier operates 35 weekly flights to three destinations in the Chinese mainland and enjoyed an average load factor of 84 percent in 2014.

On the financial front, the Dubai International Finance Center, a federal financial free zone, is already home to the regional headquarters of China’s big four financial institutions: the Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, Agricultural Bank of China Ltd and Bank of China Ltd.

Chirag Shah, chief strategy and business development officer at Dubai International Finance Center, said: “We already have a significant Chinese presence in the DIFC but as China is seeing more financial institutions going international, we can provide the right platform for them to do business in the region.” The DIFC enjoys several cooperative agreements with Chinese counterparts, such as a memorandum of understanding its regulatory authority shares with the China Banking Regulatory Commission and the China Securities Regulatory Commission.

Last month, the court system in the DIFC announced that it is seeking an agreement with the Chinese courts for mutual enforcement of decisions.



Source : China Daily | May 22, 2015

Thomas D’Innocenzi

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Indonesia can use its strength without closing borders



US Ambassador to Indonesia Robert Blake said on Tuesday that Indonesia could maintain its economic strength without closing its borders to foreign imports, as had been practiced by the President Joko “Jokowi” Widodo administration.

“Trade can help Indonesia achieve its economic goals. It can help increase Indonesia’s economic growth and reduce poverty, which is the President’s goal. […] Indonesia can play to its strength and prosper without closing its borders,” he said in a speech at Al Azhar University, South Jakarta, on Tuesday.

He further said that open trade would create opportunities for businesses for innovation and expansion, while providing lower prices and a wider choice of goods and services for consumers.

“For an economy like Indonesia where consumer spending is important for economic growth, it is necessary to ensure that consumers have access to a wide range of products and services at the lowest prices as a good way to ensure that growth continues,” he said

The US previously turned to the World Trade Organization to settle a complaint, along with New Zealand, on Indonesia’s wide ranging import restrictions on farm products like fruit, vegetables, beef and poultry.

A survey in 2013 by the International Trade Center (ITC) involing 1,000 Indonesian businesses found that 37 percent of businesses in Indonesia were affected by non-barriers to trade.

Blake went on to say that the decision on trade would be a vital strategic choice for Indonesia.

“Indonesia is faced with a strategic choice. It can turn inward and pursue policies designed to protect its companies and industries, while accepting its inefficiencies, higher prices and less choice for consumers, as well as lack of innovation,” he said.


Source : The Jakarta Post | May 26, 2015

Thomas D’Innocenzi

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Peugeot’s Chinese JV to start production in Vietnam

French automaker PSA Peugeot Citroen and its Chinese joint venture partner Dongfeng Motor Group will open an assembly plant in Vietnam and have already begun production in Malaysia, according to a Dongfeng Peugeot Citroen Automobile spokesperson.
Dongfeng Peugeot is producing compact cars in cooperation with local firm Naza Group in Malaysia and plans to begin assembling in Vietnam later this year in partnership with THACO Group, the official Xinhua news agency reported on Wednesday.
The venture aims to sell 8,700 cars in the ASEAN region this year with plans to raise sales of imported and locally produced cars to 70,000 units by 2020, the spokesperson said in an emailed response to Reuters’ request for comments.
Last year, Peugeot and Dongfeng agreed on a 3 billion euro ($3.34 billion) capital tie-up, giving the French carmaker much needed funding to turn its business around.
The two firms also agreed that their China JV would aim to sell 1.5 million vehicles a year starting in 2020, as well as consider setting up a new company responsible for sales in the Asia-Pacific region, especially in Southeast Asia.
Source : Thanh Nien Daily | May 21, 2015
Thomas D’Innocenzi
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