Friday, October 19, 2012

Recovery in China on the way

China GDP growth slowed as expected into the third quarter of 2012.  The good news was that partial activity data for the September month supports our view of a modest cyclical recovery.

GDP growth slowed from 7.6% in the year to June to 7.4% in September.  That reflected a 2.2% rise in the quarter. The NBS has only recently started producing quarterly GDP data, so we are not putting too much weight on it, but the series shows the weakest point in the cycle was the March quarter with q/q growth of 1.5%.

The good news came in the detail of the September month partial data.  Industrial production rose from 8.9% in August to 9.2% in September.  The recent slowdown reflects destocking efforts which may still have further to run.  However, lower inventories along with a modest recovery in demand next year bodes well for production further down the track.

Retail sales data was also good with the annual rate rising from 13.2% to 14.2% from August to September.   Domestic demand has held up well during the recent slowdown and reflects the authorities rebalancing efforts. 

Fixed Asset Investment also rose, primarily reflecting initiatives to boost infrastructure spending.  Manufacturing investment remains soft reflecting overcapacity.  Residential investment is still soft also although signs the recovery in house prices and sales bodes well for a modest recovery in construction in the period ahead.

This data comes on last week’s good loans and money supply data.   With monetary policy efforts focussed on reductions in the bank reserve rate, this is where we have been looking for early signals of a cyclical turning point.  I like what I see.  Export growth also rebounded in September, although that data is notoriously volatile.  It's too to expect a sustained increase in China exports. 

This data supports the view that we are on the verge of a cyclical pick-up in GDP growth.  That further reduces the need for urgent and aggressive policy action; we expect authorities will continue the process of policy "fine tuning".  We are happy with our view that GDP stabilizes at 7.4% into the fourth quarter for full year annual average growth of 7.6% with a recovery to 8.0% in 2013.