Monday, September 15, 2014

Forecast risk to China growth shifts to the downside

Only two months ago it looked like the risks to 2014 expected growth in China of 7.5% had shifted to the upside.  While I try not to read too much into monthly data, generally weak August activity data suggests the risks have now shifted to the downside.

Industrial production, fixed asset investment and retail sales all came in weaker than expect in August.  That followed release a few days ago of trade data showing that export growth had slipped from 14.5% in July to 9.4% in August, although at the time of the release of the July data we thought it looked too strong.

Negative monthly growth in industrial production and the decline in the annual rate of growth from 9.0% yoy in July to 6.9% in August is the most disconcerting element.  This appears to be related to the slowdown in the property market with annual rates of growth in the production of steel, cement, glass and household appliances such as washing machines all lower over the month.  In that respect a slowdown is perhaps not surprising.  However to put a monthly decline in IP into perspective there were only 3 such months during the GFC and only one other since, so this is an unusual occurrence.

Retail sales and fixed asset investment were also weaker than expected, although the annual growth of real retail sales ticked higher from 10.4% to 10.6%.  However sales of home appliances and furniture posted lower annual rates of growth over the moth which fits with the property slowdown story.  Sales of these items will likely remain a drag on growth in overall retail spending for the foreseeable future.

Manufacturing, infrastructure and property fixed asset investment all slowed over the month with the overall rate of year-to-date growth slowing from 17.0% for the period to July to 16.5% in the period to August.  Infrastructure had been holding up well on the back of stimulus and appears a likely candidate for more should activity continue to surprise to the downside.  The good news is the slide in property investment appears to be slowing.

After GDP growth surprised on the upside in the first half of the year, the risks to growth have again moved to the downside.  We had 7.4% penciled in for Q3.  While that looks optimistic now in light of the low IP result, export growth is running stronger than we thought it would at this point.

The Government appeared to take its foot off the stimulus pedal following the stronger data up to June.  We think we will see efforts to stabilize growth step up again.  Indeed the monetary authorities appear comfortable with the lower interbank rate over the last few weeks.  We also expect increased fiscal spending will be used should the government want to increase cyclical support for the economy along with further targeted reductions in the required reserve ratio.