Finance and Economy

Statistics published this week for November show a gloomy side to China's economy in the global recession.

Both exports and imports dropped unexpectedly in November compared to the same month last year, shedding 2.2 percent and 17.9 percent, respectively. It was the first time China’s export recorded negative growth since February 2002. However, the large gap between exports and imports has pushed the trade surplus to a new peak of over US$ 40 billion.

Altogether, China's exports showed a year on year increase of 21.9 percent between January and October, in dollar terms. However, calculated in yuan and adjusted for inflation, export growth was only 2.43 percent, while imports slumped by 5.11 percent.

Meanwhile, foreign direct investment plunged 36.52 percent compared to a year earlier, as investors repatriated money so to secure domestic cash reserves to tide companies over the current arid credit conditions. Correspondingly, foreign investors only registered around 2,000 new companies in November, a 38 percent drop from 12 months ago.

On the domestic front, the Producer Price Index (PPI) inflation rate was 2 percent in November, diving 4.6 percent from last month, mainly a result of free-falling commodity prices and weakening demand. In the past five years, inflation has only once dropped this low – in April 2006.

The Consumer Price Index (CPI) was 2.4 percent, a further decrease of 1.6 percent from October’s 4 percent, highlighting a risk of deflation in the coming year. Both food and non-food prices registered diminished growth compared with the previous month, led by the steep drop of pork prices - down 9.3 percent from a year before.

At the three-day Central Economic Work Meeting, which closed on Wednesday, it was decided to prioritize “maintaining steady and relatively fast growth” as the primary objective for 2009. The fiscal and monetary policies for next year were set to be “positive” and “moderately loose”, respectively.

Alongside the importance of supporting the strength of China’s economic growth, the leadership also stressed the urgency of stimulating domestic demand and adjusting the economy's structure, as well as the importance of an open economy and the building of a social safety-net.

Most significantly, the emphasis on promoting domestic consumption shows the decision-makers’ willingness to look to other strategies for growth, instead of heavy infrastructure investments which can lead to unhealthy economic growth. The idea of “structural tax-cuts” has attracted a lot of attention, as China prepares for new value added tax (VAT) and other taxation changes.

The meeting was also the source of another rarely heard clear message – that the yuan exchange rate should be maintained at a “generally stable” and “reasonable equilibrium level”, which to some extent dispelled suspicions that China has been devaluing the yuan to support exports.

After the Central Economic Work Conference, the CBRC confirmed that both promoting economic growth and controlling financial risk will continue to be equally important. However, some regional commercial banks expressed their fear of rising pressure from local government to promote local growth by lending to risky industries and companies.

To stimulate growth, China Banking Regulatory Commission (CBRC) for the first time has given legal status to merger and acquisition lending. The move also parallels a series of government measures and initiatives aimed at encouraging state-owned enterprises to pursue overseas, cross-region and cross-industry consolidations. In addition, as the number of overseas M&A transactions by Chinese enterprises grows, CBRC said, M&A lending services would support international expansions.

China Investment Corporation (CIC) said that it has learned from its recent investment failure. CIC, which invested US$ 5.4 billion in the U.S. money-market fund Reserve Primary Fund (RPF), is expecting to sustain great losses on the investment. Chairman Lou Jiwei said that his fund would in the near future avoid investing in developed country financial institutions to avoid similar failures.

Industry and Companies

Two major Chinese airlines, China Southern Airlines and China Eastern Airlines said that they will receive capital injections from their parent companies through share replacements. Earlier media reports said that Chinese government was planning to inject 3 billion each to the parent companies of China Southern and China Eastern, as a move to boost the distressed industry which is feeling the squeeze from series of natural disasters and the economic slowdown.

On top of this financial aid, China's aviation regulator also unveiled a series of supporting policies this week. The Civil Aviation Administration of China (CAAC) announced ten measures on December 9, including rebate and exemption of jet-fuel taxes and some facility fees, as well as continuous subsidies to airlines flying less profitable regional routes. The regulator is also encouraging airlines to cancel or postpone plane deliveries due in 2009 and has stopped approving new airlines before 2010. China's fast growing airlines started to feel the effects of declining traffic this year due to the global economic slowdown.

China's first private carrier Okay Airways halted flights on December 6 in light of the company's internal disputes. According to JuneYao Group, the airline's largest shareholder, Okay Airways staff had reported concerns to the board about the airline’s ability to continue flights due to safety issues. The industry regulator and the board subsequently decided to halt flights. But Caijing learned that the carrier's shareholders had earlier opposed the suspension. According to previous media reports, Okay Airways planned to suspend its flights on December 15.

China’s largest shipping company, China Ocean Shipping Group (COSCO), said it has canceled plans to purchase some 120 vessels in 2009, due to the depressed global shipping market. In December, the Baltic Dry Index, which tracks ocean shipping costs, fell more than 90 percent from its historic high at 11793 in May, to the lowest level since the start of the index in 1987. According to the original plan, three-quarters of the purchase were dry bulk cargo ships and the remainders were oil tankers and container carriers.

Despite the sluggish performance of the shipping market, China’s power giant China Huaneng Group plans to establish a shipping company with 500 million yuan investment. The Ministry of Transport has approved the company, called Shanghai Rui Ning Shipping Company, for operation of domestic shipping services. An industry expert said that since ship prices have dropped more than 20 percent due to weakening market conditions, the risks associated with forming a new shipping company have lowered.

Politics & Law

The General Administration of Quality Supervision, Inspection and Quarantine (GAQSIQ) said on December 10 that local quality supervision organizations had seized 312 tons of pork meat imported from Ireland. 93 tons of pork meat containing dioxin were also recalled. GAQSIQ urged the responsible organizations in Ireland to recall other contaminated pork meat products from China. On December 6, GAQSIQ asked the whole country to stop importing pork from Ireland in order to prevent more contaminated food from entering China.

A U.S. university, Northwestern Polytechnic University, was stripped of its overseas training permit by the State Administration of Foreign Experts Affairs (SAFEA) because of its involvement in the Wenzhou travel scandal. The university had provided a fake training schedule and content as supporting documents to the party visiting the US. The Wenzhou scandal was revealed in a post by a Shanghai blogger who outlined a three-week, 10-city sojourn, during which 650 thousand yuan were spent and only five days of business were conducted.

The Minister of Land Resources warned against increased illegal land use in the next two years, as the government implements its 4 trillion yuan stimulus package. Xu Shaoshi, the minister said December 1 that demand for land will rise sharply due to increased levels of investment, and so the incidence of illegal land use will also increase. Of particular concern are illegal expropriations of arable land, a common source of complaints in rural areas.