Tuesday, November 13, 2012

China activity data provides upside risk to GDP

Last week’s plethora of China activity data was all better than expected.  Annual growth to October in retail sales, exports, fixed asset investment and industrial production were all up on the growth recorded in the year to September.  It’s only the more recent release of new loans growth and money supply data that has taken the shine off a little bit by not meeting expectations.  Credit conditions remain relatively tight however social financing appears on track for a record year which will provide ongoing support for GDP growth. 
The authorities have maintained a cautious approach to easing with only a modest cut to interest rates in the middle of the year and three reductions to the bank reserve ratio that still leaves it significantly higher than the historical average.  More recently the authorities have been using short-term liquidity measure to free-up credit markets.

The tick down in annual inflation over the last two months suggests policy could have been eased more aggressively however the authorities have also been concerned not to reflate the bubble in some parts of the residential property market.  Also the labour market and domestic spending (nominal retail sales +14.5% in the year to October) have held up well, negating the need for more aggressive policy action. 

While we expect inflation to head higher from the current 1.7% annual rate in the period ahead, it appears unlikely to test the official target of 4% any time soon.  The PBoC appears likely to continue the process of “fine tuning” policy settings but they have ample room to be more aggressive should that be needed. 

At the moment it looks like it won’t be needed.  Our China GDP forecasts have annual GDP growth stabilising at the September level of 7.4% into the end of the year.  That would give annual average growth of 7.6% for the 2012 calendar year, just a tad higher than the official target of 7.5%.    The better activity data suggests there is an element of upside risk to our year-end forecast.  It’s been a long time since we’ve been able to say that about China, or any country for that matter.

We are also keeping a watchful eye on the leadership transition currently underway.  So far signals from the Communist Party Congress (at least from outgoing President Hu Jintao) appear supportive of continued rebalancing in the economy towards consumption.  Less positive are the signals that a heavy state involvement in key industries will be maintained.  That will constrain gains in productivity that will be essential if incomes are to rise to support higher consumption, at the same time as inflation is kept in check.