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As the world’s GDP slows, thus affecting China’s export growth, China is slowing after years of growth fuelled by heavily credit-relied spending in infrastructure and property investments.
The credit issues as a result on such credit-relied growth have put much stress on foreign banks as well, as they may have financed onshore entities who may have under-collateralized their loans by re-using their inventories to seek further financing via Commodity Financing Deals, which in return, the borrower will receive a repurchase agreement (Please Google for Qingdao port).
China leaders are slowly shifting its growth model to more domestic services and consumption. This in my opinion has a lot of potential (see chart 2). Retail Sales from the period of January 2014 to May 2014 grew 12.5%, beating market expectations and higher comparable to 11.9% in April. Retail sales have significantly performed beyond the economy over the past 5 years.
Chart 2: Chinise Retail Sales Growth
In March 2014, Beijing unveiled plans on initiatives the government has plans for on fiscal expansion plans, such as accelerating railway construction for central and western parts of the country, lift urbanisation rate to 60% by 2020 from 54% at present. Create financing facilities for low-income on subsidised housing, renovate and build 4.7 million homes for people living in slums and initiatives to extend tax break to help small businesses. Chart 3 shows the fiscal position of China in the May period, showing an increase in Fiscal expenditure. Expenditure by local and central governments jumped nearly 25% in May 2014.
Chart 3: China's fiscal position
The weakness in the CNY, other than reducing speculative ‘hot money’, has made goods in China more attractive for exports. There were also some monetary easing measures, where Beijing introduced targeted RRR (Required Reserve Ratio) cuts and central bank relending in the past few months, which caused a huge trade surplus in May 2014 amounting to $36bn for the month. Exports rose 7% in May from a year ago.
This however signalled an appreciation of the CNY, where the People’s Bank of China guided the CNY midpoint at 6.1485 to the dollar, which was the strongest rate since March 2014. The trade surplus number came as the biggest monthly surplus in five and a half years according to official data released.
Chart 4: China's Exports, Imports and Trade Balance