141021 - China Watch

Group Economics
Emerging Markets
China Watch
Arjen van Dijkhuizen
+31 20 628 8052
Growth slows less than markets expected
21 October 2014
Economic growth in China slowed to 7.3% yoy in Q3, an outcome that was slightly better than markets had expected. Some
slowdown was foreseen, given weak data in July and August. This illustrates that the ongoing property market correction and
the curtailment of shadow banking are leaving their marks, while it takes some time for the latest targeted stimulus measures
to have an effect. Still, several data point to some stabilisation, exports are still a welcome tailwind and the authorities remain
committed to add targeted stimulus to prevent a hard landing. Hence, while we expect the gradual slowdown of the Chinese
economy to continue, we have kept our 2014 and 2015 growth forecasts at 7.5% and 7.0%.
GDP growth slowed less than expected in Q3 …
below the 9% average of the first seven months of this year.
Today, several economic data were published, providing a
Meanwhile, retail sales and fixed asset investment continued
clearer picture of the state of the Chinese economy. Real GDP
their gradual slide, reaching 11.6% yoy and 16.1% yoy,
growth slowed to 7.3% yoy in the past quarter (Q2: 7.5% yoy),
respectively, in September (August: 11.9% yoy and 16.5%
in line with our expectations. Although this was the lowest level
yoy).
since the global financial crisis, the outcome was slightly better
than the market consensus (7.2% yoy). Quarterly growth fell to
Retail sales and industrial production
1.9% qoq (Q2: 2.0% qoq). The slowdown did not come as a
surprise, given the rather weak data in July and August. This
shows that the ongoing property market correction and the
curtailment of shadow banking are leaving their marks, while it
take some time for the latest targeted stimulus measures to
% yoy
25
20
15
have an effect on growth. Meanwhile, the economic data for
September point to some stabilisation. After falling in previous
months, both the official and the HSBC/Markit Manufacturing
PMI’s stabilised earlier this month, while the other PMI
indicators dropped somewhat but continue to show relative
10
5
0
08
strength.
09
10
11
Retail sales
Real GDP and Manufacturing PMI
%yoy
12
13
14
Industrial production
Source: Thomson Reuters Datastream
Index
12
60
Exports remain welcome tailwind
Earlier this month it turned out that exports growth surged to
11
55
10
15.3% yoy in September (August: 9.4% yoy), the strongest
pace of expansion since February 2013. Exports to both
9
50
advanced and emerging economies continued to do well,
although the surge in exports to Hong Kong (and Taiwan)
8
45
7
leaves open the possibility that over-invoicing to avoid capital
controls (typically related to exports to Hong Kong) played a
6
40
14
Economic growth (lhs)
HSBC Manufacturing PMI (rhs)
role as well. Still, with the Manufacturing PMI's export subindex
jumping to a 5.5 year high in September, there is broader
evidence that exports continue to form a welcome tailwind
Sources: Bloomberg, Thomson Reuters Datastream, HSBC/Markit
amidst a general slowing of domestic demand. Meanwhile,
imports grew by 7% in September, after contracting on an
… with industrial production rebounding
annual basis in July and August. A large part of this growth
After falling to 6.9% yoy in August, the lowest level since
was explained by export-related categories, so the resumption
December 2008, industrial production bounced back to 8.0% in
of import growth is not yet a clear signal of strengthening
September (market expectations: 7.5%), although remaining
domestic demand. Due to the pick-up of imports, the trade
2
China Watch: Growth slows less than markets expected – 21 October 2014
balance fell to USD 30.9bn (August: USD 49.8bn), but the
authorities
overall trade surplus in Q3 reached a new high.
aggressive, comprehensive monetary easing.
Lending data reflect curtailment of shadow banks
will
remain
with
opting
for
more
Inflation and policy rate
Data published last week show that aggregate lending has
recovered further, once more illustrating that the sharp drop in
cautious
% yoy / %
15
July was largely caused by seasonal and special ad hoc
factors. Both aggregate social financing and new bank loans
10
rose in September, although social financing remains clearly
below the levels seen in early 2014. In fact, bank loans now
5
correspond to around 60% of broad lending, while the decline
of trust loans reflects the authorities’ tightening measures
0
installed to contain shadow banking. Growth of M2 edged up
somewhat in September, to 12.9% yoy (August: 12.8% yoy),
while growth of M0 and M1 came down. All in all, we do not
think that the credit and monetary data give much reason to be
concerned. The slowdown of overall credit growth is a
-5
09
10
CPI
11
12
CPI Core
13
Food prices
14
Policy rate
Source: Thomson Reuters Datastream
reflection of the authorities’ attempts to tweak China’s growth
model, while aiming – amongst other things – for a
deleveraging in an orderly way and for reducing the role of the
shadow banking system.
More targeted stimulus
While the September data confirm that the Chinese economy
continues its gradual slowdown, the authorities have shown
commitment to come with targeted stimulus measures. They
Aggregate lending data
have announced several of these measures in recent months.
CNY bn
In September, it was announced that the PBoC would inject
2500
over USD 80bn into the five largest banks through its Standing
Lending Facility. More recently, the PBoC planned to come
2000
with another short-term liquidity injection of over USD 30bn to
1500
some smaller banks. Other measures taken recently were tax
cuts and loan subsidies for small firms and a general easing of
1000
property restrictions. Meanwhile, the authorities have made
clear that they will not try to smooth out all kinds of economic
500
and market fluctuations and remain cautious with adopting
more aggressive easing policies, as that would not fit into the
0
11
12
13
Total social financing
14
New loans
Source: Thomson Reuters Datastream
overall rebalancing and deleveraging of the Chinese economy.
All in all, we expect the authorities to continue with providing
additional targeted stimulus, if needed to prevent a hard
landing. We have left our 2014 and 2015 growth forecasts
Inflation continues downward trend
(which are rounded at whole or half percentage points)
Inflation has continued its downward trend that started in
unchanged at 7.5% and 7.0%.
October 2013, reaching 1.6% yoy in August, the lowest level
Key forecasts for the economy of China
2011
2012
2013
2014e
2015e
GDP (% yoy)
9.3
7.7
7.7
7.5
7.0
CPI inflation (% yoy)
5.5
2.6
2.6
2.0
2.9
-2.0
since January 2010 and far below the official target of 3.5%.
This was mainly driven by a drop in food inflation. Core
inflation fell slightly, to 1.5% yoy. Producer price inflation
remained in negative territory. We expect inflation to remain
-1.1
-1.6
-1.9
-2.0
clearly below the official target of 3.5%, although rising pork
Budget balance (% GDP)
Government debt (% GDP)
15
15
15
17
18
prices and utility tariffs may push up inflation later this year.
Current account (% GDP)
2.0
2.7
2.1
2.0
2.0
We have lowered our 2014 inflation forecast to 2%. All in all,
the latest inflation developments confirm that the authorities
Gross fixed investm ent (% GDP)
45.6
45.7
45.9
46.1
45.7
have room to add more targeted stimulus if needed, although
Gross national savings (% GDP)
50.2
50.3
49.7
49.1
48.5
USD/CNY (eop)
6.30
6.3
6.1
6.2
6.3
EUR/CNY (eop)
8.18
8.3
8.4
7.7
7.2
we still conclude from various policy statements that the
Budget b alance, current acc. for 2014 and 2015 are rounded figures
Source: EIU, ABN AMRO Group Economics
3
China Watch: Growth slows less than markets expected – 21 October 2014
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China Watch: Growth slows less than markets expected – 21 October 2014

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