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January 18, 2006

Growing Pains

Amid stories that the Chinese economy is showing few signs of slowing down...

China's tax chief said on Tuesday the economy had grown by 9.8 percent in 2005, but comments by a senior commerce ministry official and analysts suggested the pace of expansion could slow this year, if only slightly...

That would make 2005 the third consecutive year in which China's economy had grown by around 10 percent. The economy expanded by 10.1 percent in 2004 and 10.0 percent in 2003.

... and that China's accumulation of foreign reserves barrels on... 

News that China's foreign exchange reserves rose sharply in the final quarter of 2005 and are on course to overtake those of Japan as the largest in the world by the end of 2006, caused a predictable ripple of excitement in the currency market on Monday.

The knee-jerk reaction was that the continuing growth in Chinese reserves, which rose by a further $50bn to $819bn in the last quarter, would maintain pressure on the Chinese authorities to allow faster appreciation of the renminbi, thereby reducing the need to intervene in the currency market, building up yet more reserves in the process...

Julian Jessop, economist at Capital Economics, argued that reserve growth is actually slowing, with the increase in each of the past four months lower than that in the same month a year earlier as hot money inflows have "slowed sharply".

But Stephen Jen, global head of currency research at Morgan Stanley, swam against the tide, claiming China's reserves are now so large that this could be the "year of the renminbi".

... comes this news, from the Wall Street Journal (subscription required):

The second violent protest reported in China's Guangdong province within weeks is sparking concern among some investors based in the country's manufacturing heart.

A protest near the city of Zhongshan in southern China turned violent over the weekend after police moved in to clear away demonstrators, local residents and officials said yesterday. The protesters had blocked a main road to demand more compensation for land taken from them to build a factory...

Protests have grown increasingly common in China, a side effect of economic restructuring that has improved the fortunes of many Chinese but left others disgruntled over a widening wealth gap. The weekend's protest follows another violent episode last month in Guangdong, which borders the financial hub of Hong Kong and is one of China's wealthiest provinces. Local officials said three people were killed in that incident, but some villagers said the number of dead was higher.

So far, the growing number of large-scale, violent protests across the country hasn't directly hit operations of most foreign and Chinese investors. But some are starting to express concern over growing social unrest...

A manager at Foxconn, a unit of Taiwan-based Hon Hai Precision Industry Co., said that while the company hasn't felt any impact from protests or other social unrest in the area so far, he was concerned about the possibility. "If there is a problem with social order, it would, of course, affect our investment," he said. Hong Hai Precision is a prominent computer peripherals company and one of China's biggest exporters.

Other businesses in the area said the protest caused road blockages that did impede work. Road closures could "make some trouble for our customers visiting our company," said a salesman of Mingkang Packaging Machinery Factory in nearby Sanjiao Township, who identified himself only by his surname, Yang.

In the China Daily article on Chinese economic growth linked above, Vice Minister of Commerce Yi Xiaozhun was quoted as saying "we will not see a relaxed year for 2006." He was talking about pressures on export demand from potential yuan appreciation, but the applicability of that sentiment may be much broader than Mr. Yi intended.

January 18, 2006 in Asia | Permalink


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For the other side, see Morgan Stanley's Andy Xie's commentary on Jan. 17, 2006.

Posted by: cb | January 18, 2006 at 10:54 AM

Foreign investors shouldn't be worried. Their factories are always guarded better than jails, and any social unrest will not spread inside the industrial parks.
Chinese government names year 2006 as the Year of Reform, in which several big reforms on government administration, banking sector, etc will be pushed forward. Lots of things to do, lots of troubles ahead.

Posted by: R-Squared | January 20, 2006 at 09:28 PM

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