SUNDAY, DECEMBER 16, 2012
BUSINESS
China’s economy in recovery mode KCIC WEEKLY ASIA REPORT By Camille Accad
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or the past three months, China’s economy has showed strong signs of recovery. This comes after a difficult year. The country’s Gross Domestic Product (GDP) grew last year at an average 9.3% year-onyear (YoY), but slowed to 7.4% in the third quarter of 2012.In addition to slowing global demand, which hurt China’s exports, the slowdown came from the domestic sector, which was highlighted by decelerating corporate profits and a sluggish consumer sector. China’s recovery therefore comes at an unexpected moment given global growth is still lackluster. This growth comes from the monetary loosening and fiscal spending seen this year. The latest measure was a stimulus package announced in September, worth around $160 billion. The program, like previous ones, focuses on government-led investment, mostly in the form of infrastructure projects. These programs raise two concerns: (a) they do not address the need for a more dynamic consumer sector, and (b) add to the medium-term risk of overinvestment. Thus, despite some growth expected in the short run, risks are still present in the medium run. However, the government-led stimulus has succeeded at lifting industrial activity. Government projects
increased, as the graph shows, lifting industrial production (IP). In November, IP accelerated for the third consecutive month, to 10.1% YoY, the first time it grows in double-digits in 9 months. In addition, retail sales continued its upward trend, a sign that confidence in the economy is gaining momentum. However, after two increasing months of growth, exports eased in November, suggesting external conditions remain a risk to the economy’s recovery. The likelihood of a rebound in real GDP growth in the last quarter of 2012 has significantly increased in the past few months, and this has already been well received by investors in spite of the Fiscal Cliff approaching in the US. Real GDP is a measure of the economic output or of the size of the economy - adjusted for inflation or deflation. It is the sum of the values of all final goods and services produced by that country or region over a given time period. The values depend on the quantities (volume) of the goods produced and their prices. Real GDP is a measure that holds prices constant by using a given year’s value (the base date) for all items and services. Then these values are used to calculate GDP for years prior to the base year and subsequent years. GDP can be measured in several ways, and National Bureau of Statistics, the government body
responsible for national accounts data, publishes GDP by sector output (agriculture, industry and services) and expenditure (private consumption, government expenditure, fixed capital investments and trade). IP, a good esti-
portion of GDP. Overall, real GDP growth could be estimated in the short-term by analyzing the above indicators. Investment-led stimulus is the typical Chinese response to global slow-
mate of the industrial sector (about 45% of GDP), and retail sales, a good gauge for the services sector (also about 45% of GDP), are accurate indicators to determine economic growth, as they represent more than half of GDP when broken down by sector output. When looking at GDP by expenditure, retail sales and exports are also significant to determine the trend of a large
downs, with infrastructure development the primary focus. Although the model is not sustainable in the long run, it is efficient in the short-term. The industrial sector, which is already recovering, is expected to continue doing so. However, the program is currently more focused on boosting the domestic economy, as opposed to exportrelated manufacturing activity which is
a large part of the growing economy. By focusing on investments, China mitigates its main short term risk, the global slowdown, but simultaneously fuels the medium term risk of overinvestment. In spite of weak external conditions, the domestic economy is faring well. Growth in retail sales kept accelerating for the fourth consecutive month (the longest run since the crisis hit in 2007) suggesting that private consumption is in good shape. Business expansion and higher consumer confidence are both expected to bring about growth in corporate profits for the consumer sectors, which should provide support for the Chinese markets, in the absence of a major blow coming from the US fiscal cliff. After seven consecutive quarters of slowing growth, we expect real GDP growth to bottom out from a threeyear low in the fourth quarter this year. IMPORTANT DISCLAIMER: The information contained in this report is prepared by the Research Department of the Kuwait China Investment Company (KCIC) and is believed to be reliable, but its accuracy and completeness are not warranted. Research recommendations do not constitute financial advice nor extend offers to participate in any specific investment on any particular terms. Investors should consider this material as only a single factor in making their decisions.
Dutch FM open to heading Eurogroup Germany wants chair from triple-A country THE HAGUE: Dutch Finance Minister Jeroen Dijsselbloem would be willing to take over as head of the Eurogroup of euro-zone finance ministers, his office said on Friday, after a clutch of reports linked him to the job. The minister himself avoided a detailed discussion of his prospects of taking over from Luxembourg’s Jean-Claude Juncker in what has been a key role in the battle with Europe’s debt crisis. But he did admit that his name was one of many being touted for the post. “I will answer this question once it is really posed to me, meaning by the people who decide about it, the Eurogroup,” Dijsselbloem told reporters. Several European Union diplomats said Dijsselbloem’s name was discussed during a summit on Thursday and Friday, and there appeared to be widespread support for his candidacy, but leaders intended to leave it up to finance ministers to decide next month. “Dijsselbloem has impressed in just a few weeks in the job,” the Europe minister of one Eurozone country told Reuters. “He’s open-minded, straight-talking and has the languages,” the minister added, referring to Dijsselbloem’s flawless English. “There’s a lot of confidence in him.” Speaking to Dutch radio station BNR late on Thursday, Dijsselbloem said: “I believe that
everyone has been mentioned (as a candidate). I have also seen my name on those lists. “We’ll just wait and see. You have to be more worried if your name is not on the list than when it is,” he said, laughing. If Dijsselbloem took the job, he would remain Dutch finance minister, his spokeswoman said, but she added that his candidacy was currently not under discussion. Dutch public broadcaster NOS had reported late on Thursday that Dijsselbloem was considered a serious candidate to take over as chairman of the group. Germany, the largest euro-zone economy, wants a candidate from a triple-A rated economy, NOS said. Only Germany, Finland, Luxembourg and the Netherlands in the eurozone still have the highest credit rating from the major rating agencies. Finnish Prime Minister Jyrki Katainenis has also been touted as a candidate. Others include French Finance Minister Pierre Moscovici, whose country has been downgraded, and German Finance Minister Wolfgang Schaeuble, a hardliner on austerity. “It would be good if it was a solid chairman from a solid country. That’s what makes the Netherlands feel comfortable,” Dijsselbloem told reporters on Friday when asked about
the post. However, the risk of the Netherlands losing its triple-A status have increased. Its economy is expected to contract next year while the budget deficit may exceed the EU’s 3 percent ceiling, the central bank said this week. Dijsselbloem said the government would wait for the CPB, the government forecasting agency, to publish its updated economic forecasts in February or March before deciding whether new budget cuts were needed to meet the EU’s deficit targets. “Then we’ll know how far we are on track for 2013 and then we’ll decide if extra measures are necessary,” Dijsselbloem said. Juncker, 57, who has held the Eurogroup job since 2005 and has been a leading protagonist in Europe’s monetary union ever since the 1991 Maastricht treaty, said last week he would step down as Eurogroup chief at the end of the year or early next year - although it is not the first time he has said his term in the job was at an end. Dijsselbloem, 46, was appointed finance minister last month after Prime Minister Mark Rutte’s Liberal party won a general election in September and formed a coalition with the Labour party. He has been a Labour member of parliament for most of the past 12 years. —Reuters
Cliff sends US stocks lower in week NEW YORK: After racking up gains for nearly a month, US markets appeared to register more seriously the threat of the looming fiscal cliff, with selling taking hold in the week to Friday amid rising nervousness. The fixed spending cuts and tax hikes that will take hold from January 1 if battling politicians cannot compromise on an alternative threaten to send the country back into recession. For weeks, investors have appeared confident that a deal on an alternative plan to cut the fiscal deficit will get done. Buying was strong through Wednesday, as hints flew that the Republicans and Democrats would find common ground. But by Friday, there was no compromise in sight, and with the Christmas-New Year holiday period immediately ahead, the prospects for a deal were low, and investors started to show worry. “The lack of any progress in the fiscal cliff talks just kept people feeling somewhat nervous, and that is preventing the market from making any meaningful attempt higher,” said Michael James of Wedbush Securities. “That will remain the primary driver of trader sentiment over the next two weeks, regardless of anything that comes out, economic data points or overseas action. “If we go over the fiscal cliff, the US economy will go in recession.” For the week, the broad-based S&P 500 was down 0.32 percent to 1,413.58. The 30-stock Dow Jones Industrial Average lost 0.27 percent to 13,135.01, and the tech-heavy Nasdaq Composite gave up 0.70 percent to 2,971.33. Indices were generally all lower, though the yearend cliff malaise was tempered by
the scores of companies moving dividend payments to just before New Year, and announcing special dividends for the same timeframe, to beat the expected dividend tax hike that will come with whatever deficit-fixing legislation that comes. The Nasdaq was pulled lower than the others by Apple, which remained volatile but finished the week off 3.8 percent at $409.76, almost $200 below the year’s high in September of $705.07. Investors continued to show doubt about the long-term market darling’s ability to further impress with new products and market domination, as the global economy remains slow. The fiscal cliff will dominate the market through the year end, unless a deal for alternative legislation is crafted over the next week, said analysts. Hopes were at least for a shortterm compromise to avoid the worst effects but even that did not cheer analysts. “This would be a blow to confidence and the markets and would mean a slower growth outcome than in the baseline, but would stop short of a recession,” said Deutsche Bank economists. Peter Cardillo of Rockwell Global Capital was cautiously optimistic. “Maybe, if we get a surprise over regarding the fiscal cliff over the weekend, maybe we can see some agreement emerge before Christmas,” he said. “If that happens, we’ll get a very strong rally towards the end of the year.” The week ahead will deliver fresh data on housing, manufacturing, personal incomes and consumer spending, giving a better picture of the pace of the economy as the year winds up. — AFP
WASHINGTON: The US Capitol in Washington is seen at dawn. Leading lawmakers have expressed pessimism that a deal to avert the “fiscal cliff” is close, despite increasing anxiety about a Dec 31 deadline to stop the expiration of Bush-era tax cuts. —AP
Guinea to give govt staff 50% pay rise CONAKRY: The government of Guinea reached an agreement with trade unions on Friday to grant state employees a 50 percent salary increase, ending a four-month stand-off, according to the text of the deal read on state television. “The different parties agreed to an increase...of 50 percent in three phases - 10 percent from Oct. 1, 2012, 15 percent from Oct. 1, 2013 and 25 percent before the end of 2013,” the agreement read. After securing $2.1 billion in debt relief under the World Bank and International Monetary Fund Heavily Indebted Poor Countries initiative in September, Guinea offered state employees a 10 percent pay rise. The unions immediately rejected the proposal and threatened to go on strike if they did not receive a 200 percent wage increase. Though Guinea is the world’s top supplier of the aluminum ore bauxite and holds rich deposits of iron ore, gold and diamonds, more than half of Guineans live on less than a dollar a day. The highest paid state employees currently earn around $200 dollars per month. — Reuters
ROME: Two people speak in a shopping center in Rome on Friday. Italy’s public debt crossed the two-trillion-euro mark for the first time in October when it reached a record high of 2.014 trillion, the Bank of Italy said. —AFP
US commerce secretary: Return $544K in fish fines BOSTON: The acting US Commerce Secretary ordered federal regulators to return about $544,000 in unjust fines collected from 14 fishermen or fishing businesses, most of whom worked Northeast waters. Secretary Rebecca Blank also directed the National Oceanic and Atmospheric Administration to forgive two other complainants a combined $150,000 in debt. Her decisions followed the second phase of a lengthy probe into charges by New England fishermen of abusive, unfair treatment by the officers and attorneys who enforce the nation’s fishing laws. Blank’s decisions mean nearly $1.2 million in unjust penalties has now been ordered returned to fishermen. In May 2011, the commerce secretary ordered $650,000 in unjust fines given back. New Bedford fishing boat owner Carlos Rafael, who will receive $17,500 back after Blank’s order, said he’s pleased to get anything, given the industry’s ongoing struggles. But he said the bigger victory is accountability for fisheries’ officers. “Even if I didn’t get any money, the world is watching them,” he said. “Before nobody was watching them. ... Before they were like the Gestapo. Before you were (automatically) guilty, the party was over.” The 15-month investigation covered cases between March 1994 and February 2010. It included interviews with people who absorbed five-, six- and even sevenfigure fines for violations ranging from paperwork problems to allegedly fishing in closed areas. A total of 93 cases were reviewed, and the commerce secretary ordered money returned or debt forgiven in 27 cases - 23 of which originated in the Northeast. In a memo accompanying his 554-page report, special investigator Charles Swartwood said fishery police and attorneys sometimes assessed unreasonable penalties or jacked up fines to pressure fishermen to settle at lesser amounts. Blank said in the memo that enforcement officers who abused their power were the exception and noted the complaints verified by Swartwood in both reports make up less than 1 percent of the enforcement work done during the review period. “This decision concludes the department’s review of past cases, but our commitment to strong, effective and trusted fisheries law enforcement will continue,” she wrote.
US Sen. John Kerry said the second report again confirms enforcement “horror stories” he’s long heard from fishermen. He added the money can’t make up for the harm done to businesses, but getting the truth out can help rebuild damaged relationships with NOAA. Dan Sobien, head of the National Weather Service Employees Organization, a union that represents fishery enforcement officials, said his members were simply enforcing penalties that Congress established. “This report is a politically driven result of a politically driven witch hunt,” he said. “All of the prosecutorial decisions criticized in these reports were legal, consistent with (NOAA)’s policies, and within the context of a legal judicial system.” The largest amount ordered returned Friday was $373,500 to the two primary shareholders of a New Bedford-based seafood business, who were accused of accepting illegally caught fish and interfering with the subsequent investigation. Swartwood found NOAA used the fact the two were trying to sell their business as leverage to force a settlement. In another case, a fisherman had to pay $10,000 for failing to transmit his position while fishing, though he explained a wave had washed through his window and disabled his computer. Rafael was fined $25,000 after authorities said the holes were too small in the twine at the top of his scallop net, through which fish can escape. The violation was accidental and resulted in $29.50 worth of unintentionally caught fish, the report said. Swartwood was appointed by former Commerce Secretary Gary Locke in 2010, after a report by the Commerce department’s inspector general revealed dubious and disproportionate penalties against Northeast fishermen. The IG’s probe also showed former top fisheries cop Dale Jones had wrongly ordered documents shredded during the investigation. And it said the millions in penalties paid by fishermen were used on questionable expenditures, including a luxury undercover boat. NOAA has since changed its law enforcement leadership and made reforms to improve accountability in how penalties and fines are handled. Swartwood completed the second report after Locke agreed in March 2011 to allow Swartwood to hear more complaints. —AP