CHINA SECURES TURNAROUND

Inflation in China quickened in December， with the Consumer Price Index （CPI） rising to 2.5 percent， up from the 2.0 percent registered in November （see Chart 1）. Chinas coldest winter in almost three decades is raising inflation fears due to spikes in food and energy prices. Lower-than-average temperatures in both north and south China are prompting higher demand for natural gas and disrupting agricultural production. The Chinese Government is currently moving to contain rising produce prices by lowering power and distribution costs for vegetable producers and transporters， releasing vegetable reserves and calling on companies to maximize gas output and raise imports. Factory gate prices continued their momentum， as the Producer Price Index （PPI） fell by 1.9 percent in December， easing from Novembers 2.2 percent drop （see Chart 2）.

Consumption， trade pick up speed

Retail sales， one of the countrys key economic indicators， rose 15.2 percent in December from a year earlier， accelerating from 14.9 percent in November and matching its fastest pace in all of 2012 （see Chart 4）. Retail sales for 2012 increased 14.3 percent to $3.3 trillion， 2.8 percentage points less than that in 2011. Meanwhile， Chinas trade surplus rose sharply in December to $31.6 billion from $19.6 billion in November on unexpectedly strong exports. Imports grew by 6 percent to reach $167.6 billion （see Chart 5） while exports rose 14.1 percent to reach an all-time high of $199.2 billion （see Chart 6）. Overseas shipments increased 14.1 percent year on year， the highest increase since May. Chinas exports are set to recover as long as conditions in the world economy continue to improve. A rebound in trade may give Chinas new policymakers more time to shift the economy toward domestic consumption to sustain expansion.

Manufacturing holds steady

Activity in Chinas manufacturing sector remained in expansionary territory for the third consecutive month in December， as the official Purchasing Managers Index （PMI） was unchanged at 50.6 from November （see Chart 3）. A reading above 50 indicates an expansion in manufacturing activity while a reading below 50 indicates contraction. The latest PMI reading points to steady growth ahead and a positive start for the economy in 2013. However， the recovery remains unbalanced with output in the oil processing， quarrying and tobacco industries slipping while output in the food processing， auto manufacturing， textiles， steel and electronics industries expand.

Economy officially turns the corner

Chinas economic growth accelerated in the fourth quarter of 2012， largely settling a debate about whether or not China would experience a hard or soft landing after a more than two-year slowdown. The countrys gross domestic product （GDP） rose by 7.9 percent year on year in the fourth quarter， up from 7.4 percent growth in the third. Overall， GDP growth cooled to a 13-year low of 7.8 percent in 2012， exceeding Beijings official 7.5-percent target for growth but nonetheless marking a significant deceleration from 9.3 percent growth in 2011. Chinas GDP growth is likely to stabilize at around 8 percent in 2013， a relatively robust pace compared to other large economies.

POWERING AFRICAS INDUSTRIAlIZATION

Economic growth in Africa has been largely spurred by market liberalization and improved public management of finances as well as a boom in the commodities that the continent has in abundance. However， perhaps the biggest factor has been the engagement of emerging powers led by China， whose demand for African resources is stimulating a revival in the terms on which the continent trades. According to Ernst & Young， Africa is probably 30 years behind China on the developmental curve， leading to speculation that Chinese companies will start to look at parts of Africa as potential sites for low-cost manufacturing and outsourcing.

Africa has become an increasingly important investment destination for Chinese machinery and auto companies as Chinese companies look for more attractive growth opportunities in other emerging markets. As Chinas economy slows， Chinese manufacturers are targeting African markets for profits to offset sluggish domestic demand. However， for Chinese companies， going overseas now entails a much more complex business model than simply loading goods onto a ship and selling them in Africa. As tax barriers increase and profit margins get slimmer， Chinese manufacturers are adopting other approaches to explore overseas markets， including building complete knock-down （CKD） assembly plants， where machinery is delivered in parts and assembled locally and materials are procured locally.

Guangxi-based Liugong Machinery Co. has prioritized Africa as one of its strategic markets. During the first three quarters of 2012 alone， Liugong increased its revenue from South Africa by 117 percent year on year to reach $62 million. SGMW， a joint venture in which SAIC Motor Corp.， Liuzhou Wuling Motors Co. and GM China have stakes， is also treating Africa as one of its most important overseas markets. A factory has already been established in Egypt， serving the North African and Middle Eastern markets. In November， operations at the BAW South Africas new minibus assembly plant officially commenced， which is expected to boost the development of the local taxi industry as well as create more than 1，000 local employment opportunities. BAW South Africa is the result of partnership formed by the Industrial Development Corp.， Beijing Automobile Industry Holding Co. （BAIC） and China Africa Motors（CAM）， the previous importer and distributor of BAW taxi vehicles into South Africa. While the new plant will assemble taxis on a semi-knocked down basis， there are plans to eventually establish a CKD manufacturing plant， marking an important step toward full localization and manufacture of taxis in the country.

Closer relations between the private sector and government undeniably help to ensure these projects can benefit the local economy in the long run. Similarly， African governments are expecting much more from foreign manufacturers who are looking to set up facilities inside their country. Market entrants are now expected to create jobs and help build supply chains to attract other manufacturers. The government is doing their part as well， with government investment in power helping to develop much needed African power capacity increases that will in turn drive manufacturing and resource beneficiation， initiating a positive circular effect which will further power Africas own industrial revolution.

The ChinAfrica Econometer is produced by The BeiJinG AXiS， a China-focused international advisory firm operating in four principal areas： Commodities， Capital， Procurement， and Strategy.

For more information， please contact： Daniel Galvez， danielgalvez@thebeijingaxis.com www.thebeijingaxis.com

Cote dIvoire_January： The Cote dIvoire Government announced it secured a $500 million loan from the exportImport Bank of China for the countrys largest hydroelectric dam to be built by sinohydro Corp. Work commenced on the 275-megawatt plant at soubre in January and will continue for more than four years， with operations scheduled to begin by late 2017 or early 2018.

GHANA_January： Ghanas Volta River Authority （VRA） announced it secured a $286 million loan from the Chinese Government for the development of ferry crossing and landing beaches along the Volta Lake. Part of that loan being granted by China Development Bank （CDB） would also be used to develop Volta Lake Transport Companys （VLTC） port facilities at Akosombo and Buipe.

RWANDA_december： The Chinese Government announced it has pledged about $35 million in grants and concessional loans to Rwanda. The package is a part of the Chinese Government‘s pledge of providing $20 billion in concessional loans to African countries within the next three years to assist in developing infrastructure， agriculture， manufacturing and small and medium-sized enterprises.

DJIBOUTI_December： China Merchants Holdings （International） entered into an agreement with Djibouti Ports and Free Zones Authority to acquire a 23.5 percent stake in Port de Djibouti sA （PDsA） for $185 million. PDsA， a strategic location for Chinese shipping activities in the region， includes a multi-purpose terminal， a container terminal and a dry port.

ZIMBABWE _January： Chinese state-owned company shandong Taishan sunlight Group announced plans to invest up to $2 billion in an advanced coal exploration project in a western province of Zimbabwe. A sino-Zimbabwe joint venture agreement has been signed and has secured a coal concession of 100，000 hectares in Matabeleland North， with reserves of over 2 billion tons of coal. Taishan will inject up to $2 billion to develop coal mines， coal bed methane extraction and power projects.