06.03.2013

Short analysis Monika Rosen, Chief Analyst at Bank Austria Private Banking:
China's stock exchange overshadowed by politics

  • Chinese equities market proving to be particularly volatile at present, likely cause being changes in leadership.
  • In spite of the recent slowdown in growth, China has become the second larget economic power in the world over the 10 years that Jiabao has been in office
  • Bank Austria reckons economic growth this year will total 8.2%; the consensus among analysts is 8.1%. For 2014, Bank Austria expects approximately 8%.

The Chinese equities market is proving to be rather volatile just now. One reason for the strong fluctuations in prices is probably the National People's Congress, which has just started in Beijing and will involve a change of leadership after 10 years.

Departing Prime Minister Wen Jiabao announced the economic goals for the country in his farewell address. The targeted growth rate this year is roughly 7.5%. This will come in slightly below the previous year's figure of 7.8%, which was the lowest since 1999. Bank Austria reckons economic growth this year will total 8.2%; the consensus among analysts is 8.1%. For 2014, Bank Austria expects approximately 8%.

The inflation target for 2013 according to Jiabao is 3.5%. This means he has lowered the inflation target by 0.5%, and set the bar high for his successor. The departing prime minister also announced that both interest rates and the yuan exchange rate should increasingly be oriented towards the market. After the interest rate cuts last June and July, we do not expect to see any loosening of Chinese monetary policy in the near future.

In spite of the recent slowdown in growth, China has become the second largest economic power in the world over the 10 years that Jiabao has been in office. This meant that China overtook Japan and Germany, and survived the global financial crisis without any major problems. However, his successor will be confronted with the negative consequences of this development. The growing gaps in the pace of development and income amongst the population, the rising debt and the paucity of measures protecting the environment are just some of the lingering problems at the end of Wen Jiabao's term of office. The former Prime Minister admitted to the National People's Congress the lack of a sustainable growth model and the growing social issues in China, and called amongst other things for an immediate solution to the environmental and pollution problems.

Conclusion: According to experts, China's new leadership now needs to launch quick reforms with a view to preventing the Chinese economy from making a hard landing and striking a balance between growth and resource efficiency. When the People's Congress announced measures to cool the real estate market down, the equities index in Shanghai posted its largest single-day loss since August 2011. Trends turned back upwards on the next day of trading, but sentiment is still very edgy. In the medium term though we reckon that China's economy has bottomed out, and this fact will soon be reflected on the equities market as well.

Enquiries: Monika Rosen
Chief Analyst at Bank Austria Private Banking
Tel. +43 (0) 50505 - 40104
E-Mail: monika.rosen@unicreditgroup.at