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August 2014
A positive turn in global finance for emerging-economy group
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China Econometer  
 
VOL.6 September 2014
Econometer

HOUSING DRAGS DOWN GROWTH

Amid a sustaining decrease in the value of the housing market, several Chinese cities have abolished household registration restrictions on property investment. Chengdu, the hub of development in southwest China, has notably proposed and then revoked its offer of a 3-percent housing loan subsidy for first-time buyers. Amid fears of building modern "ghost towns," Chinese municipalities began to enact restrictions on property investment from as early as 2009.

The property market is considered one of the most profitable and stable investments, thus this policy was difficult for many hopeful homebuyers. However, Chinese policymakers are now afraid of the repercussions of the rapid decrease in activity in China's property development sector. The slump in the property market has been strong enough to bring the China Services Index to a record low. Some analysts suggest that this may indicate that the government's stimulus measures are failing to gain traction outside of manufacturing. 

Manufacturing up

Meeting analyst expectations, China's consumer price index, a main indicator of inflation, increased by 2.3 percent year on year (yoy) in July. This increase, in part due to the increase in food prices, falls a comfortable distance from the government's targeted limit on inflation for the year - 3.5 percent. China's manufacturing purchasing managers' index, an indicator of the development of the manufacturing sector, increased to an 18-month high of 51.7, the fastest expansion in more than two years, which likely suggests that the government's stimulus plan is, indeed, making an impact on the manufacturing sector. 

Export and retail figures steady

Trade and retail figures provide valuable insight into the status of the transition of China's economy from an export-oriented manufacturer to a service-oriented economy, whose growth is based on domestic consumption. Growth in exports from China has continued to increase, coming in at 14.5-percent yoy in July. Import growth, on the other hand, has been lackluster in recent months, dropping by 1.6 percent yoy in July. Retail growth has continued its steady development, falling slightly under estimates of 12.4 percent at 12.2-percent yoy growth in July.

 

 

Rising debt risk

As debt risks mount, the amount of GDP growth produced by each dollar of new credit has shrunk from 29 cents in 2007 to 20 cents in 2014. Nevertheless, Beijing is continuing to expand credit to ensure that the nation increases employment and meets this year's GDP target of 7.5 percent. The recently released China Monetary Conditions Index from Bloomberg, which takes into account loan growth, real interest rates and the nation's real effective exchange rate, rose by the largest jump since 2012 in the second quarter of 2014. This credit growth has continued among fears of debt risk.

As costs increase in China and other Asian manufacturing countries, the "African Tigers" are competing to absorb displaced manufacturing capacity and become the next leaders of low-cost manufacturing. Recognizing the success of export-led manufacturing growth in bringing the Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan) out of poverty, African business and political leaders are seeking to mimic this success at home. The leading East African economies of Ethiopia, Kenya and Rwanda provide competitive manufacturing environments with unique strengths.

In addition to low labor prices, low-cost African economies benefit from key duty-free and quota-free trade agreements, such as the United States' African Growth and Opportunity Act and the EU's Everything but Arms pact. However, these East African nations face a host of challenges in absorbing Asian manufacturing capacity. For example, many are unable to provide a stable supply of electricity, and thus local enterprises face a costly reliance on generators for electricity.

Ethiopia, Africa's second-most populous country, has been successful in attracting investment from China through the nation's Chinese-constructed special economic zones, such as the Ethio-China Light Manufacturing Special Economic Zone, 30 km outside of Addis Ababa. In this zone, one of China's largest shoe manufacturers, the Huajian Group, began operations in January 2012. Even when their lower productivity is accounted for, Ethiopian workers present a dramatic cost reduction to manufacturers. Ethiopian workers at the Huajian factory receive a monthly wage of $40 per month, whereas the average manufacturing wage in China was $625 per month in 2013.

Manufacturers in these economic zones also benefit from relatively low property and utility costs, in part due to the government's interventions to attract foreign investment. Huajian stated that it achieved profitability within a year of operation, and that its profitability prospects will improve as landlocked Ethiopia improves its underdeveloped transportation system. Currently, the cost to transport a container from Addis Ababa to the nearest port of Djibouti is roughly equal to the cost of shipping from Guangzhou, China to Djibouti. The government seeks to decrease these costs through a 10-year, $4 billion infrastructure development program.

Kenya represents one of the most open and progressive states in Sub-Saharan Africa, and the government has recently approved three special economic zones, one of which will be implemented jointly with the Dongo Kundu Transshipment Freeport. The recent increase in Chinese investment in Kenya means that China is now Kenya's largest source of foreign direct investment.

With the second-highest ranking in the World Bank's Ease of Doing Business index in Sub-Saharan Africa (behind Mauritius), Rwanda presents a uniquely stable business environment. Chinese C&H Garments Co., for instance, recently announced plans to establish a 200-employee factory, which, if successful, will be used as a "proof of concept" to attract other manufacturers to Rwanda.

 

 

 

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