Some readers constantly have questions about China and the “miracles” of the world’s second largest economy. So we decided to post a little Q&A; section for you. Actually, the whole thing was created and answered by Itau, the largest bank in Brazil, to their clients. But … we could not miss the opportunity to sneak in and provide our “valuable” opinion too…

On Economic activity:

1. What is the growth outlook for 2012?
 

Itau: We expect GDP will grow 7.8%. The slowdown is induced by less investment and exports.
BB: We are shooting for 7.2%…

2. What is the growth outlook for 2013-2020?
 

Itau: Trend growth declines marginally with a moderate rebalance of the economy.
BB: Hard landing… Japan 1980’s anyone?
3. What are the main short-term risk factors?
 

Itau: The main risk factors are global recession and sharp deceleration of the real-estate sector.
BB: Chinese killing themselves in the street after losing 50% of their money in the stock market and 30% of real estate devaluation…
4. Is consumption growing?
 
Itau: Consumption is growing in 2011 (9.3%), tending to continue in 2012.

BB: Not fast enough when compared to fixed investment.
5. Is there over investment?
 

Itau: Investment in government-controlled sectors is slowing down in 2011. In the remaining sectors, investment is in line with income gains and competitiveness.
BB: Like never seen before in the history of mankind…
6. What is the outlook for the real estate sector?
 
Itau: The sector should slow down, in a movement induced by the government.

BB: Prices to come down 30% within a year, and 50% within 2-3 years.
7. What is the impact of the global slowdown?
 

Itau: Activity should suffer additional impact in case of a crisis, but relatively less than in 2008.
BB: Europe, the major trading partner with China, is slowing… so guess what will happen with the Dragon?
8. Is China losing competitiveness?
 

Itau: Productivity growth is partially compensating wage increases. Unit labor costs are rising faster than in other emerging countries.
BB: Big time… as labor cost increases, several multinational companies are relocating to Vietnam, India, and even back to the US!

On inflation:

 
9. Will inflation be a concern again in 2012?
 

Itau: Stagnation of commodity prices and domestic deceleration should ensure that inflation is not a concern again in 2012.
BB: It should stay the same as 2011… commodity prices are softening, as wages are increasing. But of course the government will lie about the numbers, you know how that works…

On social security:
10.  What has been the recent evolution in social security?
 

Itau: Spending on social security as a share of GDP increased in the past four years. Retirement coverage widened, but is still low.
BB: May we say none?

On the fiscal situation:
11. What is the general government debt?
 

Itau: The net general government debt (including local governments and central bank) is approximately 50% of GDP.
BB: who really knows? Go and trust the chinese government data…

On the financial system:
12. How was the last reform in the banking system implemented (1998-2008)?
 

Itau: The reform involved transferring non-performing loans from the banks to asset management companies, capitalization of banks by the government, and IPOs.
BB: Shady recap strategies… who cares, as long as they get more creative this time.
13.  What is the outlook for non-performing loans in the banking system?
 

Itau: Non-performing loans ratio should rise in the next few years, as a result of loans to local governments. Commercial banks can absorb the losses.
BB: Again, who really knows?
14. How risky is non-conventional financing (shadow banking)?
 

Itau: Alternative financing is small and is being monitored.
BB: Wow… Itau believes in Santa too.

On economic statistics:
 
15.  Are statistics reliable?
 
Itau: Statistics are reliable but have failures. They allow the evaluation of economic activity and inflation.

BB: Sure! After all, the Chinese government primes for being trustworthy…

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