China's National Bureau of Statistics reported 9% economic growth in 2008. The quarterly figures came in at 10.6% in the first quarter, 10.1% in the second, 9% in the third, and 6.8% in the final quarter of 2008. Having recorded double-digit growth rates for five consecutive years since 2003, the recent downward trend is clear indication of an economic slowdown. Experts consider this China's greatest crisis since its reform 30 years ago.
Lower consumer confidence in developed countries, due to the recent global financial crisis, has caused a significant reduction in China's exports. Once considered the world's factory, China has been suffering from negative export growth since November 2008. In January 2009, exports totaled 90.5 billion dollars, 17.5% less than the same month last year. In February, US$64.9 billion worth of good and services were exported, but this was a 25.7% drop from a year ago.
Contraction of China's export industry has not only reduced investment by the local companies, but it has also led to a drop in the inflow of foreign capital. Until recently, many multinational companies invested in China for the manufacturing of products to be exported overseas. However, as decreased consumption in the overseas markets has led to reduced exports, these companies have cutback investment in China. In November 2008, aggregate foreign direct investment was only US$5.3 billion, 37% lower than the same month in 2007.
Another reason for weak investor sentiment is the deterioration of business environment in China. The recent rise in Chinese labor costs has caused a serial collapse of labor-intensive export companies. In Guangdong province, many foreign companies from Hong Kong and Taiwan, are withdrawing by the day. Furthermore, the Chinese government is reinforcing investigation into allegations regarding fabrication of transfer pricing, as well as demanding greater transparency in currency exchange deals. Having to operate in such a strict business environment has limited management activities of foreign companies.
As with foreign direct investment, foreign portfolio investment in the Chinese Stock Exchange is reversing. As the global financial crisis deepens, financial institutions in developed countries are selling their shares of Chinese governmentowned commercial banks. Last December, UBS, the Swiss financial institution, sold all of its 3.4 billion H shares (shares of Chinese companies listed in Hong Kong's Hang Seng) of Bank of China. The foundation run by Asia's richest man, Li Ka-Shing, sold 2 billion Bank of China shares in January 2009, and Bank of America cleared 5.6 billion shares of China Construction Bank. Royal Bank of Scotland has also retrieved its US$2.4 billion dollars invested in Bank of China.
According to the reports released by People's Bank of China, the country's foreign reserves have increased in December 2008, despite the apparent outflow of foreign capital. However, the increase of foreign reserve was due to changes in the exchange rate. In actuality, around US$25 billion flowed out of China in December alone, and Bank of China estimates that a total of US$150 billion was withdrawn from China during the fourth quarter of 2008.
Global financial institutions will continue to sell Chinese stock in 2009, as lock-up periods on the stocks held by the multinationals are nearing their end. The Chinese government prohibits selling of stocks held by the controlling shareholders for a given period after a company goes public. For Industrial and Commercial Bank of China, 50% of whose shares are held by Goldman Sachs, Allianz, and American Express, this grace period ends on April 28, 2009. Other stocks of major banks, such as Bank of China, China Construction Bank, and Bank of Communications, will also soon be cleared for transactions, which could lead to sharp fluctuations in stock prices of China's financial institutions.
FOCUSING ON PRICE STABILITY OVER GROWTH
China has never seen as many changes in its economic policies as it did in 2008. …