Did China’s latest GDP numbers offer evidence of continued strong growth? Rebalancing in action? Or did they point to the rising risk of a significant slowdown in growth in 2012 and beyond? Given the polarised nature of the China debate, it is possible to find analysts and economists positing all of these theses by focusing in on particular aspects of today’s data.
The headline numbers, at least, appear to dispel fears of an imminent hard landing. Yes, Chinese GDP growth dropped below 9% during the final quarter of 2011, but only just – Q4 GDP growth came in at 8.9% y-o-y, above consensus, meaning that China’s full year GDP grew by 9.2% last year. Both industrial production and retail sales accelerated in December; industrial output growth rose to 12.8% y-o-y, from 12.4% in November, while retail sales rose 18.1% y-o-y in December, compared to 17.3% y-o-y in November.
Furthermore, the data contained some positive signs of growing consumption power that could support continued rebalancing of the economy towards one driven by domestic demand rather than trade or investment. Rural income growth outstripped urban wage growth last year, but both showed growth rates in the high teens. The average monthly income of migrant workers broke through the RMB 2,000 barrier for the first time, rising 21.2% in 2011.
So far, so bullish... This was certainly the mood on Asian markets today. The Shanghai Composite Index, which was among the worst-performing of all global stock markets in 2011, rose 4% on the back of today’s data release, while the Hang Seng was up more than 3%.
However, those looking for warning signs for the year ahead didn’t have to dig too far beneath the glossy surface.
The investment numbers, in particular, pointed to a significant slowdown in investment growth during the final months of the year. While the government does not publish a monthly investment breakdown, a number of analysts hurriedly crunched the numbers – and the resulting trend was unmistakable. Fixed-asset investment grew by 25% y-o-y in October, 21.2% in November and 18.5% in December.
Safe as houses?
This slowdown was particularly marked in the country’s property sector, which has seen a marked slowdown in both transactions and prices in recent months due to continued government restrictions on mortgage lending and second-home purchases. Real estate investment growth slowed to 12.3% y-o-y in December, down from 20.1% in November. Property sales (by floor space) declined 6.7% y/y in December, versus a decline of 1.7%y/y in November.
New housing starts fell by almost 25% in December, while, over the year as a whole land space purchased for real estate development was 22.6% percentage points lower than in 2010.
This final number is worrying for indebted local governments, many of which derive at least a third of their revenues from land sales. Should this slowdown continue into 2012, not only will it eat further into growth rates, but it will increase the local government debt burden – and, therefore by extension the debt burden of the central government as well. China bears from Nouriel Roubini to Jim Chanos and Hugh Hendry have pointed to a collapse of China’s real estate market as the likely trigger for a hard landing – and the December numbers will have them sharpening their claws – and strengthening their short positions.
What to conclude about the latest numbers? First, talk of a hard landing in 2011 appears to have been wide of the mark, while criticism of the government’s policy response also appears to have been overblown.
According to UBS’ chief China economist, Wang Tao:
| “In retrospect, the government’s macro policy stance in 2011 seemed to have been broadly appropriate. The government did not tighten too much, the economy did not slow sharply, there was no property sector collapse or debt crisis related to local government debt, and inflation did not get out of control.” |
Brian Jackson of RBC Capital Markets makes a favourable comparison between the gradual slowdown see during the final months of 2011 and the sudden drop-off in economic activity in late 2008:
| “In contrast to the sharp downturn in quarterly y/y growth at the end of 2008 and early 2009, China's slowdown this time around is taking place at a much more gradual pace, making it less disruptive and alarming for policy-makers. Back in 2009 Beijing, was forced to implement an aggressive policy stimulus in order to reverse the freefall in activity, but this time around policy-makers have more freedom to respond flexibly.” |
But that does not mean that there aren’t significant risks to the outlook for 2012, with almost all analysts predicting a further growth slowdown during the first quarter of this year. There are already clear signs of a property slowdown which is likely to eat further into growth in 2012, especially if this is accompanied by a marked deterioration in the external environment. And most of the risks that were flagged up last year – a property slowdown, an export collapse, a policy misstep by the government, rising local government debt – remain very real concerns. Todd Lee, Xianfang Ren and Alistair Thornton at IHS Global Insight are among the more pessimistic analysts in terms of outlook:
| “As China strides into the Year of the Dragon, its economy is in the midst of an aggressive slowdown ... The property market correction is providing the greatest downside momentum, with still-tight credit conditions choking activity in the broader economy and the precarious eurozone providing plenty of drag. The worst is still to come, with GDP growth likely to sink over a percentage point lower this quarter.” |
Policy bind
On the policy front, almost all analysts agree that the stronger-than-expected headline growth number will preclude any drastic policy action in the near-term, with the government continuing to ease bank lending restrictions and using cuts to the reserve requirement ratio, rather than interest rate adjustments, as its main policy tool.
In other words, more of the same, with those expecting a second major stimulus package akin to that announced in November 2008 likely to be disappointed.
Here is a round-up of policy predictions for 2012 on the back of today’s numbers:
Brian Jackson, RBC Capital Markets:
| “We expect that growth will moderate further in 2012, but also that this slowdown will remain relatively steady. This suggests that Beijing will not be forced to implement a dramatic shift in the policy stance as was the case in 2009 when growth fell sharply. We expect policy rates to be kept on hold in the near term, with any adjustments to the policy stance taking the form of lower bank reserve requirements.” |
Ting Lu, Xiaojia Zhi and Weijun Hu, Bank of America-Merrill Lynch:
| “Simply put, Beijing will continue its policy easing which was started in mid-Oct, though we should not expect a big-bang stimulus. Beijing will keep its “proactive fiscal, prudent monetary” policy stance in 2012, but we expect fiscal policy could be more proactive and monetary policy will be eased from an over-tightening in 2011. We expect no major easing on property tightening, but Beijing could allow slacker enforcement of home purchase restrictions in lower-tier cities.” |
Yiping Huang, Jian Chang and Lingxiu Yang, Barclays Capital
| “Today's data confirmed that there is no urgent need for aggressive easing. In our view, the PBoC will likely cut the reserve requirement ratios again in the coming weeks, most likely around the Chinese New Year. This is mainly because liquidity conditions have become tighter recently, evidenced by rising money market interest rates. Therefore, RRR cuts can be regarded as a reversal action of sterilisation. Unless economic activity shows significant signs of weakness, the PBoC is likely to maintain its prudent monetary policy in 2012.” |
Wang Tao, UBS
| “Policy has clearly turned to support growth. With inflation dropping and growth slowing, China has gently but clearly changed macro policy direction from tightening to somewhat supportive of growth. In 2012, we expect the government to continue on this path, increasing bank lending by at least RMB 8 trillion, likely supported by 2-3 additional cuts in RRR, and increasing social spending and investment in social housing and infrastructure. The magnitude of policy easing will depend on the weakness of exports and property construction.” |