Core Views Reiterated Following Q213 Growth Print

BMI View: In typical fashion, China's Q213 real GDP growth print came in bang on expectations, at 7.5% year-on-year (y-o-y). Still, the headline number does confirm what we have long suspected - that the first quarter upswing in mainland economic activity would prove temporary. In this article, we reiterate our baseline scenario for the Chinese economy, which is calling for further growth weakness and macro instability in the coming quarters.

In typical fashion, China's second quarter real GDP growth print came in bang on expectations. According to the National Bureau of Statistics (NBS), the economy grew by 7.5% year-on-year (y-o-y) in real terms in Q213, a slight slowdown from the previous quarter's 7.7% outturn. We do not read too much into the headline number provided by Beijing given the lack of a granular breakdown and growing question marks over the transparency of official data. Nonetheless, the 7.5% number has confirmed what we have long suspected - that the first quarter upswing in mainland economic activity would prove temporary. In this article, we reiterate our baseline scenario for the Chinese economy.

1) Monthly Data Paints A Worse Picture

Growth Relapse Underway
China - Real GDP Growth, % chg y-o-y

BMI View: In typical fashion, China's Q213 real GDP growth print came in bang on expectations, at 7.5% year-on-year (y-o-y). Still, the headline number does confirm what we have long suspected - that the first quarter upswing in mainland economic activity would prove temporary. In this article, we reiterate our baseline scenario for the Chinese economy, which is calling for further growth weakness and macro instability in the coming quarters.

In typical fashion, China's second quarter real GDP growth print came in bang on expectations. According to the National Bureau of Statistics (NBS), the economy grew by 7.5% year-on-year (y-o-y) in real terms in Q213, a slight slowdown from the previous quarter's 7.7% outturn. We do not read too much into the headline number provided by Beijing given the lack of a granular breakdown and growing question marks over the transparency of official data. Nonetheless, the 7.5% number has confirmed what we have long suspected - that the first quarter upswing in mainland economic activity would prove temporary. In this article, we reiterate our baseline scenario for the Chinese economy.

Growth Relapse Underway
China - Real GDP Growth, % chg y-o-y

1) Monthly Data Paints A Worse Picture

A snapshot of the most valuable monthly data points to a much worse macro picture than the headline numbers would suggest. Trade data, in particular, have endured a tough time of late. Excluding Chinese New Year distortions, June nominal exports and imports contracted together in y-o-y terms for the first time since October 2009. While there has been some speculation of a 're-alignment' of Chinese trade data, the broader trend is one of deterioration, and the recent weakness is reinforced by anaemic trade and port throughput data seen in Taiwan and Hong Kong.

2) Slowdown Will Intensify In H213

While some positive news flow out of the US and even Europe could bode well for a rejuvenation in exports in H213, this is far from assured, and China's macroeconomic problems go well beyond the relative health of external demand. To be sure, a number of leading economic indicators are pointing to a worsening growth performance in the second half of the year. Firstly, the HSBC manufacturing purchasing managers' index (PMI) has sunk well below the 50 boom-bust line, hitting a nine-month low of 48.2 in June. Secondly, money and credit aggregates have started to roll over. Total social financing, a broad measure of net new credit issuance fell 41.6% y-o-y in June to CNY1.0bn, the first monthly fall in 14 months. The freeze-up in credit can be traced back to the financial stress witnessed in China's money markets last month ( see 'Beijing's Credit Crunch Conundrum', June 20). From a macro perspective, without fresh injections of credit greasing the wheel, Chinese investment activity will almost certainly face a further fall-out in the coming quarters.

Bad And Getting Worse
China - Exports, Imports (LHS) & Manufacturing PMI (RHS)

3) The Authorities' Reform Efforts Will Give Way

China's fledgling leadership has attempted, albeit tentatively, to allow the country's economic adjustment to take place in an orderly fashion. In particular, the government has refrained from further corporate bailouts in the heavy industry sector - a policy recently impacting giant shipbuilder Rongsheng Heavy Industries. It has also been reported that the government actually engineered June's spike in interest rates as a warning signal to reckless financial lending, and China's Finance Minister Lou Jiwei claimed earlier this month that 6.5% growth 'would not be a big problem'. While Beijing's increasingly hardline stance is encouraging from a long-term perspective, we continue to see this as a case of too little, too late. The poor capital allocation associated with China's huge run-up in fixed investment spending in recent years will need to be unwound, triggering recessionary pressures. Furthermore, we doubt whether the authorities will retain such resolve should economic headwinds become acute. We see scope for at least one 25bps interest rate cut in 2013 (with further easing next year), coupled with banking sector bailouts and additional fiscal pump-priming over the long term.

A Structural Slowdown
China - Real GDP Growth, %

4) No V-Shaped Recovery In 2014

The consensus view for 2013 real GDP growth (currently at 7.6%) has pretty much caught up with our 7.5% projection, and downside risks to our forecast are certainly mounting. Where we differ most from the mainstream view now is that China is facing a structural slowdown in its economic growth potential. We expect the economy to expand by 6.7% in 2014 (versus a Bloomberg consensus of 7.6%), as the country's investment story unravels and consumption activity fails to shoulder the full burden of growth. Such a scenario will almost certainly come hand in hand with a material property price correction and growing expectations of currency weakness. To be sure, our end-2014 Chinese yuan forecast of CNY6.300/US$ would imply a 2.7% depreciation from spot.

Read the full article

This article is tagged to:
Sector: Country Risk
Geography: China, China, China, China
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.