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CBA: China Economic Monthly

Posted by Joseph Trevisani on Jul 16, 2013 4:38:00 PM

Commonwealth Bank of Australia

 

China Economic Monthly:Q2 GDP growth tests Beijing’s bottom line

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  We revise GDP growth forecasts to 7.6% for 2013 (8.1% previously) and 7.8% for 2014 (8.2% previously).

 

  The domestic economy appears on track to meet this years official target of 7.5% while expanding at its potential rate.

 

  June economic data show continued stabilization in broad activity with retail sales improving markedly.

 
 

 

Key points

 

The Chinese economy expanded by 7.5% in Q2 from a year ago.  On a sequential basis, real GDP growth picked up slightly to 1.7% (QoQ) from 1.6% in the preceding quarter.  As such, while it was the fifth consecutive below 8% quarterly expansion, the domestic economy appears on track to meet this year’s official target of 7.5%.

Year to date, final consumption contributed 3.4 percentage points to the headline growth, whereas capita formation added another 4.1 percentage points.  By contrast, net exports’ contribution shrank in the second quarter, following the crackdown on inflated export bills by the authorities in recent months.

The Q2 “underperformance” of consumption however doesn’t constitute a return to “imbalances”.  Consumption’s contribution has been always the strongest in the first quarter of the year due to the Chinese New Year celebration, whereas investments normally rebound in the second quarter.  More specifically, in 2009 – 12, the share of final consumption to total GDP was on average 63% compared to 34% for investments.  In Q2, the share of investments typically rose to more than half of GDP.

Similar seasonal patterns can be also observed from the quarterly GDP series.  Before 2009, the real GDP growth was normally the fastest in Q1, outpacing the remainder of the year by an average of 1 percentage point.  Interestingly, the ten year pattern disappeared in the most recent five years, most likely because the National Bureau of Statistics (NBS) started to adopt seasonal adjustment technique which culminated in the publishing the quarter on quarter series in 2011.

The key indicators continue to show signs of stabilizing in broad activity.  On a month on month seasonally adjusted basis, fixed asset investment rose by 1.51% in June, compared with an average of 1.46% in 2012.  Similarly, industrial production increased by 0.68%, a pace seen in the past 18 months.

More promisingly, retail sales accelerated markedly to 1.26% (MoM) from 1.06% in 2012 and 0.82% in Q1 2013 respectively, as the temporary effect from extreme weather condition in the first quarter dissipates (see CBA International Economics: China Economic Monthly – Cold weather clips Q1 GDP growth).

Nevertheless, the growth shaving in Q1 is putting downward bias to our initial growth projection for 2013, exacerbated by a smaller than expected net export contribution in Q2.  On that note, export growth stalled to just 4% (YoY) in Q2 from its robust pace of 19% in Q1.

As a result, although we continue to pencil a slight acceleration in quarter on quarter expansion from 1.7% in Q2 to 1.9%, the average QoQ growth in 2011 – 13, in coming quarters, we now expect the Chinese economy to expand by 7.6% in 2013 (8.1% originally pencilled).  Accordingly, we revise down 2014 GDP forecast to 7.8% from 8.2% previously.

The downward revision of 0.5 percentage point for 2013 is expected to have limited spill over to our baseline outlook for the regional economies as well as commodity prices.  A 10% reduction in investment would lead to a cumulative shaving of 0.5 – 2 percentage points in two years to output in the region.

Moreover, while China’s impact on global commodity prices has risen in the past decade, it remains smaller than that of the US.  Perhaps most importantly, the new forecasts remain within our potential growth estimate of between 7 – 8% p.a. for the next five years (See CBA International Economics” China – What does slower economic growth in China mean?).

Retail sales recovered, although property curb bit

Sales of construction materials (18%) and furniture (16%) remain sluggish, as the authorities reiterate their commitment to maintaining property controls.  At the same time, the recent fiscal austerity move undertaken by the central government to reduce spending by 5% impinged on food consumption in recent months, which increased by 12.5% in June, down from its average of 15% in 2012.

Residential investment rose from 2012 low base

The recovery in residential property market, albeit from a low base, continues to buttress fixed asset investment growth.  In June, residential investment rose by 19% from a year ago, almost doubling its average growth of 12% in 2012.  As a result, growth in overall fixed asset investment has maintained its robust pace of around 20% seen in the past 18 months.

Industrial production remained sluggish

Industrial production slipped to 8.9% from a year ago in June.  Manufacturing sector outperformed, rising by 9.6% (YoY).  Production of electricity, gas and water accelerated to 6.6% (YoY) from 4.4% in Jan – May.  By contrast, steel output rose by 7.2%, its slowest in eight months.

The June official manufacturing PMI, while moderating, managed to stay above the crucial 50 level and the decline was smaller than the average 1 percentage point see historically in the month of June.  On balance, the recovery in the manufacturing sector remains sluggish.

Export growth stalled on export bill crackdown

In June, China’s overseas shipments fell by 3.1% from a year ago, compared to the market expectation of around 3 – 4% (YoY).  We had expected weaker than consensus trade numbers out of June month.  In particular, we believed that exports should have increased by just a tad above 2% from continued crack down on inflated export and base effect.

On that note, seasonally adjusted, the June exports fell by a more subdued 1% but rose, on a sequential basis, by 2.1% (MoM) from May, pointing to a fairly significant base effect.  Similarly, the continued crack down on inflated export receipts also had some dampening effect on export growth, although the divergence between headline export growth and export growth excluding Hong Kong appears to have already mostly disappeared.

Notwithstanding the transitory factors, the robust momentum seen in the first four months of 2013 appears to be subsiding quickly, reflecting the more challenging external environment as well as the sizable appreciation in the domestic currency against those of China’s main trading partners.  In that regard, the International Monetary Fund (IMF) revised down global growth again this week with highlighting the more acute downside risks (see CBA International Economics: IMF WEO Outlook, July 2013 – “Growing pains”).

Indeed, exports to China’s key export destinations slowed significantly in May – June.  Shipments to the ASEAN region, which accounts for roughly 10% of China’s total exports, increased by 18% in Q2 from the same period last year, compared to 28% in the first quarter.  Similarly, recovery in exports to the European Union appears to have stalled (8% in Q2 vs. 3% in Q1).  Last but not least, shipments to Japan continued to contract by an average of 4%, as the JPY depreciation against the CNY of more than 20% erodes China’s trade competitiveness.

While imports of key commodities continue apace, the moderating commodity prices are putting a dampener on import growth.  For example, imports of iron ore and coal, in volume terms, grew by 5% and 13% respectively in January   June.  However, prices of iron ore and crude oil fell, on average, by 5% and 16% during the same period.  Indeed, total imports fell by 0.7% from a year ago in June, compared to 9% in the first quarter or 5% in 2012.

Against slower imports, trade balance widened to US$ 27bn in June, compared to an average of US$ 16bn in the first five months.  Looking ahead, we believe that sluggish commodity prices should continue to contribute to elevated trade surplus, offsetting softer export growth momentum.  We maintain that China is likely to sustain an average monthly trade surplus of US$ 20bn this year, with risk mostly on the upside.

Stronger CPI reflected food prices and base effect

In June, the headline consumer price index (CPI) rose by 2.7% from a year ago, compared to 2.1% in the preceding month, while market consensus had expected a more muted acceleration to 2.5% (YoY).  The stronger than expected headline number was driven by higher food prices and base effect.  As such, it should not alter the existing “prudent” monetary policy stance.

More specifically, food price were up by 4.9% (YoY) and contributed roughly 1.6 percentage points to the headline CPI.  By contrast, the core inflation measure which excludes costs of food and energy even slowed slightly to 1.7% from 1.8% (YoY) in April, pointing to muted inflationary pressure.

Moreover, on a sequential month on month basis, both core and headline CPI were absolutely unchanged in June, suggesting that base effect was mainly responsible for the stronger than expected headline number.  Looking ahead, we expect the headline CPI to stay well behaved at around 2 – 3% for the remainder of the year, below the implicit inflation target of 3% from the People’s Bank of China (PBoC).

We expect inflation risk to remain subdued this year.  First, factors that lifted food prices in recent months, such as base effect, seasonality and poor weather, are expected to subside in coming months.  Second, softer global commodity prices and persistent capacity overhang should continue to dampen costs of key industrial products.  Last but not least, the absence of underlying inflationary pressure is likely to anchor the core CPI comfortably at below 2% (YoY).

PBoC clamped down on off balance sheet lending

In June, broad money (M2) moderated to the official target of 14% (YoY), following months of rapid expansion.  At the same time, new CNY loans surged by 860bn, compared with 667bn in May.  However, the share of bank credit in the all encompassing “total social financing” measure spiked to 83%, reflecting the intensified effort from the authorities to curtail off balance sheet lending activity.  On that note, total social financing rose by 30% in June, down from its breakneck pace of 60% in Q1.

The rapid growth of off balance sheet financing, which constituted as much as half of total social financing in recent quarters, point to still flush liquidity condition.  The key challenges for the People’s Bank of China (PBoC), at the current juncture, are to curb excessive credit growth, achieve targeted deleveraging and sever the on and off balance sheet propagation.

Against these backdrops, we expect the PBoC to keep its “prudent” policy stance unchanged despite the recent tumults on the money market (see CBA International Economics: China – Muted spill over from higher short term interbank lending rates).

 
 
 
 
 

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