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jiangyi China's economic surge could boost Japan - Subscribe
The research suggests that overseas demand will be one of the strongest drivers of Japan's economic recovery. China is the country's biggest trading partner and the largest export destination for its goods.

At present, China runs a trade deficit with Japan, but that may change during the coming months, because the island nation is likely to need more Chinese goods to aid post-disaster reconstruction, analysts said.

CASS predicted that in the wake of the 9.0-magnitude earthquake, which unleashed a 7-meter-high tsunami on March 11 and prompted a nuclear crisis, Japan's economy is likely to grow at a rate of between 1 and 2 percent this year, a sharp decrease from its GDP growth of 3.9 percent in 2010, a 20-year high.

"Following the disaster, trade relations between Japan and China will be further strengthened," Zhou Shijian, a senior trade expert from Tsinghua University in Beijing, told China Daily. "There will be more opportunities for trade between the two countries," he said.

Talks on establishing a free- trade zone between China, Japan and South Korea may start next year, said Chinese Premier Wen Jiabao during his two-day working trip to Japan and South Korea on May 21 and 22.

Japan's recent disaster has had a limited influence on its trade with China, according to the CASS research.

Japan's efforts to rebuild its disaster-stricken areas may lead to an increase in its imports from China, said Zhou.

From 2002 to 2010, China had an accumulated trade deficit of $236.23 billion with Japan. In 2010, it increased to $55.6 billion, according to CASS.

Japan is likely to relocate its product component factories to other countries, including China. That may boost Japan's imports and alter the trade deficit, Zhou added.

Zhang Xiaoji, senior researcher at the Development Research Center of the State Council, said that China's trade deficit with Japan is not likely to widen in the short term.

"The aging population in Japan will result in a labor shortage and reduce industrial production, indicating a decrease in exports," he said.

On Tuesday, Moody's Investors Service said that a downgrade of Japan's sovereign debt rating is likely, once it has completed a three month review, which will consider the economic effects of the recent natural disasters and the nuclear crisis.
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jiangyi Manufacturing slows amid credit squeeze Jun 1st, 2011 7:55:58 pm - Subscribe
To soak up excess liquidity, and fight inflation, the People's Bank of China has raised interest rates four times since October, and the reserve requirement ratio for banks - money that has to be set aside by the lenders - has been raised eight times since then to reach a record 21 percent.

"It is possible that the central bank will cut the reserve requirement," Dong said. "With signs of inflation easing and an economic slowdown, China will loosen its tightening policies to help achieve a soft landing."

The effectiveness of the tightening measures seems limited, as the consumer price index (CPI), a main indicator of inflation, is likely to hit a record high in May.

It rose by 5.3 percent in April year-on-year, 0.1 percentage points lower than the 32-month high for March.

The CPI will peak at around 6 percent this year, and make the 4 percent annual target set by the government impossible to reach, said Credit Agricole Corporate and Investment Bank in a research note.

With high inflation, the rising cost of capital and dwindling orders, small and medium-sized enterprises are facing difficulties and some have declared bankruptcy, said a businessman surnamed Pan in Wenzhou, Zhejiang province, whose enterprise produces 40,000 pairs of shoes every day.

But Yao Wei, China economist at Socit Gnrale, said the PMI declined less than expected. In seasonally adjusted terms, it actually picked up, he said.

"If we compare this report with May reports from previous years the deceleration seemed to be much smaller than it appeared to be.

"The moderation may turn out to be temporary if tightening policies do not continue," he said.

He expected that the CPI will reach a new high in May, and the combination of a stable growth momentum and rising inflation will probably force the central bank to hike interest rates within two weeks.

The seasonally adjusted HSBC PMI dropped to a 10-month low of 51.6 in May, down from 51.8 in April, signaling a modest decline.

"The marginal slowdown in the HSBC manufacturing PMI reflects cooling demand as a result of tightening and temporary inventory adjustment," said Qu Hongbin, chief economist with China and co-head of Asian Economic Research at HSBC.

"This is still just a moderation rather than a meltdown in growth, so there is no need to worry about over-tightening."

He added that Beijing is likely to keep tightening mainly through banks' reserves and interest rate hikes in the coming months.

Lu Zhengwei, chief economist at the Industrial Bank, predicted that the central bank may still raise the reserve requirement again in June, and an interest rate hike is likely in June or July.

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