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LC

30-90 days

The recent damage to China's poor record on product safety and quality control has been notable. The adulteration of toothpaste and of cough medicine with a poisonous industrial solvent was only the latest in a string of such scandals. Food and drugs in China are often contaminated with illegal levels of pesticides in the case of foods, or worse, adulterated with toxins and dangerous substitutes.

0-2 months

15.0 months

The accumulation of Chinese FX reserves continues and is underpinning low levels of transfer risk. The central government is opening up new conduits for capital to exit China legitimately but these are restricted to institutional investors whose demand for foreign assets is limited. However, the deflation of the apparent stock market bubble is easing fears of a later, larger drop.

US Eximbank

Full cover available

Atradius

Full cover available, no discretionary limits

ECGD

Full cover available

Euler Hermes UK

Full ST cover available

The Q2 2007 GDP figures were published in July 2007 and have renewed concern that the economy is overheating. The supply-side data recorded 11.9% year-on-year (y/y) growth; and 14.9% in quarter-on-quarter seasonally-adjusted growth. These figures were driven higher by the June 2007 fixed asset investment figure; it rose from 25.3% y/y in Q1 2007, to reach 28.6% y/y in June 2007. Machinery imports, preliminary steel consumption data and construction all showed renewed buoyancy and are likely to have caused this upswing in fixed-asset investment. The policy response is likely to be limited to the 27 basis point interest rate hike announced immediately following the Q2 2007 data release. With a five-yearly party congress due in October 2007, and in the absence of data as to exactly which sectors are behind the latest acceleration in fixed-asset investment growth, we expect that the central government will not enforce credit-cutting administrative measures. The short-term outlook for shippers thus remains neutral.

Three areas do give cause for concern: foodstuff and general product quality standards; bilateral relations with the US; and food price inflation. The court-ordered execution of the former head of China's drug approval authority in July 2007 for licensing medicines for bribes indicated that the central government is aware of the chronic problems with food and drug control in China but has yet to establish any working strategy. The anarchic nature of local industry and the weak authority of the centre mean that enforcing basic safety standards will be extremely difficult. Rather more is required than closing down a few notorious factories. The fear in the US over toxic solvents in Chinese toothpaste was damaging; Chinese products' weak quality control is complicating bilateral relations with the US, where produce safety scares regarding Chinese products have become widespread. On many fronts, Chinese-US relations have the potential to be awkward in 2007-08. These include China's rocketing trade surplus, which exceeded the 2006 total in Q1-Q2 2007 alone; Chinese-made armaments in Iraq; curbs on US meat exports to China, in apparent retaliation for the unwelcome focus on Chinese goods' safety records in the US in recent months; the glacially slow appreciation of the yuan (appreciating far more slowly against the US dollar than the US administration would like); and more regulatory barriers to FDI in strategic sectors in recent quarters.

Finally, ecological damage and the rapid pace of industrial development, irregular rainfall and animal disease have all contributed to rising food prices. Excluding food, the CPI was up just 0.7% y/y in June 2007. However, owing to food price inflation in pork, poultry, eggs and grain, y/y the CPI grew 4.4% in June. Although the spike in food prices is still less than in 2004, it could have economic repercussions.

Confirmed Letter of Credit

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Foreign Exchange

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Medium-term

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Short-term

A measure of a country's net trade, service, and other non-capital flows.

The total of a country's debt interest and principal payments in relation to annual export revenues.

The public sector balance expressed as a proportion of total domestic economic output.

The growth in the total goods and services produced within a country, taking account of inflation.

The increase in consumer prices reported as an end-year or annual average figure.

The proportion of total output directed toward investment.

A measure of the importance of industry within an economy.

The degree of dependency of an economy on oil.

Oil price per barrel.

Average daily output of oil.

The total public sector debt in relation to the size of the domestic economy.

A measure of a country's net import and export flows.

The percentage of the registered labour force that is unemployed.