Monday, April 16, 2012

China GDP

China GDP came in at 8.1% in the year to March 2012, down from 8.9% in the year to December 2011 and its lowest level since 2009. The result was lower than the market was expecting, but higher than our forecast. We had expected a result under 8%.

We continue to believe this marks the low point in the current cycle. Recent partial data supports that view. The official manufacturing PMI has strengthened in recent months (although the HSBC-Markit index which has different coverage is lower). We expect industrial production growth will begin to move higher in the current June quarter.

More significantly, growth in both the money supply and loans accelerated in the March month indicating that monetary easing measures to date (a lower reserve ratio requirement) are already having an impact.

The makeup of recent data has also been positive from a rebalancing perspective. It’s significant that China managed to post growth in excess of 8% over a period in which exports were weak and investment growth has been slowing. Consumption growth is holding up well with retail sales rising an annual 15.2% (nominal) or 11.3% (real) in March.

Consumption growth is expected to remain relatively robust on the back of strong wage growth and fiscal policy settings that are increasingly supportive of a rebalancing of the economy towards consumption. Urban disposable incomes rose a nominal year-on-year 14% in March.

More easing is likely in the months ahead. That's despite the rise in inflation in the year to March. The CPI rose from 3.2% in February to 3.6% in March. That's still well below the 6.5% recorded in the year to July last year and the official target of 4% for 2012. However, we are increasingly of the view that easing will be in the form of fiscal measures rather than cuts to interest rates. Further reductions in the reserve ratio are likely which will support the recent recovery in loans growth.

Those expected easing measures along with a modest recovery in Europe in the second half of the year (which will help exports) has us continuing to expect China GDP growth of 8.5% this year.