Monday, September 17, 2012

China growth revised down

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Partial economic data points to a continued slowdown in economic growth in China.  Industrial production slowed further in August held back by weak export growth (Europe) and destocking also played a significant part in the slowdown.  On a brighter note, destocking bodes well for future production.  Recent PMI manufacturing data has been soft, particularly new export orders.  There is no sign of an imminent turnaround there.

Fixed asset investment has also slowed further.  However a breakdown of that result shows manufacturing investment was weak, but infrastructure staged a modest recovery.  That reflects previously announced new infrastructure projects now impacting the activity data.

On the positive side of the ledger, exports recovered somewhat in August but growth remains well below recent levels.  Retail sales continue to hold at around the 13% annual growth rate, and money supply and loans growth are both staging a modest recovery.  The recovery in loans primarily reflects recent reductions in the bank reserve ratio.  Finally, while the manufacturing sector is slowing, the non-manufacturing is holding up well.  New orders in the non-manufacturing PMI are still running at healthy levels.

The housing market is also showing some recovery, both in terms of prices and volumes, suggesting that Chinese authorities may have been successful in deflating the property bubble without popping it.  It means the authorities will be cautious about easing too aggressively in the period ahead and risking a renewed reheating of that sector. 

Inflation is currently low although base effects and higher commodity prices mean we are now through the low point on the cycle.  After reaching 1.8% in the year to July, the annual rate rose to 2.0% and we think it will head back to around 3.5% over the next 12-18 months.  That is still below the official inflation target of 4.0%.

This leaves room to ease both monetary and fiscal policy.  We think the People’s Bank of China will move to cut interest rates and further reduce the bank reserve ratio.  It is the reserve ratio where we think there is most room to move.  The ratio has been lowered progressively to 20% since November last year, but remains well in excess of the 10 year average of 10%.  Interest rates are likely to be cut further.

Increased infrastructure spending will continue to play a part in the stimulus.  Indeed the National Development and Reform Commission (NDRC) has just announced a number of new rail infrastructure projects.  However, we don’t expect to see a wholesale increase in spending.  That would risk reigniting criticism following the 2008/09 stimulus package that led to the speculative property bubble and build up in local government debt.  It would also be counter to the government’s aspirations of better quality growth and they will be keen not to inflate another bubble in parts of the property market. 

With continued weakness in Europe and a slow policy response we have revised our China GDP forecasts down for this year and 2013.  From 7.6% in the year to June 2012, we are now forecasting China will slow further to 7.2% in the year to September and to then remain at that level into the fourth quarter. From there we expect growth to stage a modest recovery into next year as destocking ends, the residential housing market continues a modest recovery and expected easier monetary and fiscal policy is forthcoming.  That results in annual average growth of 7.6% in the 2012 calendar year (8.0% previously), rising to 8.0% in 2013 (8.3% previously).