China December data on balance reinforces the story of gradual slowdown with policy support moderating the pace of the slowdown. There is nothing in this set of data to change our view that fears of a hard-landing are overdone.
GDP for the year came in at 6.8% yoy with the annual average at 6.9%. That’s just below the 2015 target of 7% and above the new target of 6.5% per annum in the 13th Five Year Plan. The nominal data shows that growth in primary industries were weak over the quarter with secondary sectors (manufacturing, construction) stabilising at a low level with tertiary sector activity (services) remaining the strongest performing sector.
December month activity data showed a further slowdown in industrial production to 5.9% in December with retail sales also slowing to 11.1% in December from 11.2% in November. Fixed asset investment was also lower than expected, largely due to lower infrastructure investment. On a positive note real estate investment improved (to less negative) in December. While house prices have been recovering recently our expectation was that investment activity would remain weak given the still significant oversupply, especially in Tier 2 and 3 cities.
Recovery in property prices has been a key part of our expectation of a soft landing in China. Property is a far more significant proportion of household wealth than shares. What happens in the housing market is far more critical for consumer confidence and household spending than the volatility in the share market.
Today’s data comes after last week’s better than expected trade data. While it could be the case we are near the bottom in the global trade cycle, it's too early to expect a recovery. Global inventories remain too high to expect any significant pick-up in trading activity any time soon. Over-invoicing may also have played a part in the result.
Money and credit data was also released last week and while weaker than expected, money supply and credit growth are supportive of the economy generally. That said financial conditions remain relatively tight with real interest rates still too high. Further monetary easing is likely in the form of interest rate reductions and cuts in the required reserve ratio.
We still don’t think we’ve seen the full impact of prior efforts to stimulate the economy. Interest rate cuts, new projects, new subsidies and tax cuts all take time to have an impact but all add up to a significant effort to support the economy.
But its important to remember this is not about restoring old levels of growth. It's about managing the pace of the slowdown during an important yet challenging rebalancing of the economy to what will ultimately prove to be lower but more sustainable rates of growth in the future. While there will be fall-out and missteps along that way it will be good for both China and the global growth. We continue to expect 6.5% growth in China in 2016.
For more on the recent ructions in markets, click here www.ampcapital.co.nz/news-and-research for a commentary from our Head of Investment Strategy Keith Poore.