Thursday, March 29, 2012

Further China slowdown in Q1, but still a soft landing

China GDP growth has been slowing since the first quarter of 2010 when annual GDP growth peaked at 11.9%. By December 2011 it had slowed to 8.9%. Recent activity data indicates the China economy slowed further into the first quarter of 2012. We continue to believe China is experiencing a “soft landing”.

The current quarter is hard to read because of the data volatility around the Chinese New Year. However, looking through the volatility it appears momentum has slowed further into the current quarter. In particular, industrial production for the two months of the quarter to February has slowed to 11.4%, down from 12.8% in the December quarter. The rate of annual growth in exports (on a 3-month moving average basis) has halved from around 20% a year ago to 10% currently, reflecting the recent weaker global (esp. Europe) growth environment.

Tighter monetary policy has had a significant impact on growth as well. Monetary policy was tightened to reflect the sharp rise in inflation and property prices last year. Property prices are now starting to move lower and general inflationary pressures have also receded. Annual core (non-food) inflation has fallen from a most recent peak of 3.0% in August 2011 to 1.7% in February 2012.

There is, therefore, scope for authorities to ease monetary conditions. Indeed there have already been moves to loosen up on banking sector reserve requirements which we believe will lead to a stabilisation of lending growth at the current 15% level. The authorities have targeted money supply growth of 14% this year, up from the current annual growth rate of 13%. We believe interest rate reductions will follow later this year.

However, we believe there is greater scope to move on fiscal policy. The recently announced 2012 Budget is expansionary with the fiscal deficit moving to 2% of GDP in 2012 from 1% in 2011. Spending on social housing and social measures that will, in time, lead to a drop in precautionary households savings are supportive of consumption growth and the necessary rebalancing in the Chinese economy.

We see annual China growth dipping below 8% in the March 2012 quarter, but then heading back towards 8.5% as the year progresses. That’s a soft landing by any definition...