Friday, July 13, 2012

Is China at the bottom of the cycle?

As was widely expected annual China GDP growth slowed further in the year to June.  The rate of growth slowed from 8.1% in the year to March to 7.6% in the year to June, broadly in line with market expectations.  Other partial activity data was also released today, mostly slightly better than expected although industrial production was a tad weaker. The good news is that inflation is cooling rapidly with the annual CPI now sitting at 2.2% for the year to June.  That provides scope for further stimulus. 
Slowing growth and inflation vindicates recent actions to ease both monetary and fiscal policy.   This includes several cuts to the bank reserve ratio requirement (RRR) and two reductions in interest rates.    In the latest interest rate reduction last week the People’s Bank of China lowered the one-year financing rate to 6.0% and the one-year deposit rate to 3.0%.  There has also been a number of new infrastructure projects announced recently.

Given most of the easing to-date has centred on reductions in the RRR, we have been looking to loans growth to provide the early signs the easing is starting to have an impact.  It was therefore pleasing to see new loans come in at RMB 920 billion in June, up from RMB 793 billion in May. 
With inflation heading down and now well below the official target of 4% there is scope for more easing, particularly with respect to further reductions in the RRR. Authorities will however be conscious of not wanting to inflate another property bubble.  The RRR is currently at 20%, while the historical average is closer to 10%, so there is plenty of room to move. 

We expect further interest rate cuts and further fiscal stimulus.  However, we don’t expect the same degree of fiscal stimulus as we saw during the GFC, some of which was possibly wasteful:  authorities will remain committed to their current 5-year plan objective of better quality growth and economic rebalancing.

On the back of this latest result we have shaved a bit off our calendar year GDP forecast.  We continue to expect GDP growth to recover modestly over the second half of the year, but 8.5% (q4/q4) looks like a bit of a stretch.  We now expect an outcome around 8.2%.