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China
The economic growth slowdown continued at the start of 2012. Industrial production growth has lost speed, hampered by
weaker exports and domestic demand. In this context, the authorities are expected to maintain their cautious countercyclical
policy conducted since last autumn, while supporting the "structural" moderation of economic growth. The budget
presented for 2012 foresees a de facto moderately expansionary policy. For its part, the central bank has said that it is
satisfied with recent inflation trends and has greater leeway to improve liquidity conditions gradually going forward.
A slow start of year
Losing speed
Despite distortions due to the Chinese New Year, economic activity indicators as
a whole clearly point to an inflection in real GDP growth, which is expected to be
below 8.5% year-on-year in Q1, compared with 8.9% in Q4 2011. Industrial
production grew 11.4% YoY in the first two months of 2012 (graph 1). This
figure, to be compared with the average growth rate of 13.9% in 2011 and 15.7%
in 2010, points to a sharp slowdown in manufacturing activity, hampered both by
a weakening in foreign demand and moderation in domestic demand.
Amid an unfavourable global environment, export performance not surprisingly
remained mediocre in the first three months of 2012. Exports grew only 7.6%
year-on-year (versus 14.3% in Q4 2011), constrained mainly by the contraction
in sales to EU countries (-1.8% YoY). Although China is currently experiencing a
rise in its production costs (increasing wages, real appreciation of the yuan,
rising energy costs), it has apparently not yet lost market share. The country still
accounted for 10.6% of total world exports over the period January-November
2011, like in 2010.
Imports posted 7.3% YoY growth in January-March 2012, versus 20.6% in Q4
2011. This slowdown has moved in step with the slowdown in exports and
domestic demand, but is still partially attenuated by growth in commodity
purchases (which account for 30% of total imports). As a consequence, the trade
balance temporarily went into the red in February. The trade surplus measured
as a 12-month moving sum, which is more representative of China's foreign
trade performance, contracted to USD 160 bn at end March 2012, compared
with 185 bn at end 2010 (graph 2). This trend is likely to continue in 2012.
Retail sales growth proved disappointing, slowing to 14.7% YoY in January-
February in nominal terms (11.5% in real terms), versus 17.6% in Q4 2011
(13.0%). This decline is partly due to household purchases brought forward to
December because of the planned removal at end 2011 of certain subsidies on
purchases of household appliances and the relatively early date of the Chinese
New Year in 2012 (23 January). We expect a renewed acceleration of household
consumption in the near future given ongoing revenue growth and the slowdown
in inflation.
Manufacturing investment also slowed, falling from growth rates exceeding 30%
in the second half of 2011 to 21.5% in January-February 2012, and the very
recent fall in profits of industrial enterprises is likely to adversely affect their
investment capacity in the coming months. Real estate and construction
investment growth posted an unexpected upturn, partly stimulated by public
housing development programmes. However, this upturn could be only
temporary given recent trends in the property market: sales fell heavily at the
start of the year; the average housing price has started to decline (-0.1% in
February month-on-month and +0.2% YoY), and a number of real estate
developers face liquidity problems (graph 3).
The authorities prepared to press on the accelerator?
The authorities have shown until now the firm intention of allowing the downward
adjustment in the property market to go on. In the meantime, they will probably
continue with a cautious easing of economic policy, designed to underpin
demand faced with difficult external conditions, while supporting the "structural"
moderation of growth. The government has introduced a series of countercyclical
measures in the past six months, and at the same time announced at the
National Party Congress in March an economic growth target of 7.5% for 2012.
This figure, which is a "direction to be followed" and not a target to be achieved,
had been fixed at 8% each year since 2005.
The announced budget for 2012 projects a general government deficit of 800 bn
yuan, or 1.5% of GDP. The initial budget for 2011 projected a deficit of 900 bn
yuan, or 1.9% of GDP, but the actual budget deficit reached in 2011 was 1.1%,
notably because revenues far exceeded forecasts. The 2012 budget therefore
foresees a de facto moderately expansionary policy. Moreover, the central
government still has comfortable room for manoeuvre, which could lead it to step
up its stimulus measures in the coming months – by maintaining emphasis on
measures designed to encourage private consumption and further industrial
restructuring (tax cuts, welfare spending, investment in education, healthcare
and the water and environment sectors, for example). All in all, we estimate that
the consolidated general government deficit could be close to 2% of GDP in
2012 (graph 4).
The problem of local government debt, a hangover from the 2008-2009 stimulus
package, has to be settled and today represents a constraint on economic policy
(graph 5). Whereas fiscal policy cannot inconsiderately rely on new investment
projects of local governments, the latter have extensive responsibilities in the
areas of welfare policy, utilities and infrastructure development. The authorities
are therefore trying to find solutions designed both to improve local government
finances in the medium term and settle their short-term liquidity problems –
because defaults on their loans would have severe consequences: they would
considerably hamper the conduct of economic policy, they would adversely
affect the credit quality of banks' loan portfolios, and they could feed social
unrest in the regions in question. As a consequence, the central government has
stepped up its monitoring of the financial situation of local governments since
last year and has authorised some "model" cities and provinces to levy a
property tax and issue bonds directly in the domestic market. Pending more
wide-ranging reforms, the authorities recently authorised local banks to carry out
a massive rescheduling of local government loans reaching maturity this year, on
certain conditions of profitability of the projects financed. This decision should
make it possible to loosen the debt stranglehold on local governments in the
short term.
The "moderately expansionary" fiscal policy will go hand-in-hand with "cautious"
monetary policy easing. The central bank has said that it is satisfied with recent
trends in inflation, which fell to 3.2% YoY in February 2012, the lowest rate since
June 2010 (graph 6). Inflation went back to 3.6% in March, again due to food
price pressures (+7.5%), but the slowdown in core price inflation continued
(+1.4%). In this context, the central bank has greater room for manoeuvre, and
will probably continue to improve liquidity conditions via quantitative measures
(further reductions in reserve requirement ratios, open market operations) and
do more to encourage bank lending. All in all, monetary expansion should
nevertheless remain moderate this year, as suggested by the M2 money supply
growth target, which is currently set at 14% for 2012, i.e. a similar rate to 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
China
The economic growth slowdown continued at the start of 2012. Industrial production growth has lost speed, hampered by
weaker exports and domestic demand. In this context, the authorities are expected to maintain their cautious countercyclical
policy conducted since last autumn, while supporting the "structural" moderation of economic growth. The budget
presented for 2012 foresees a de facto moderately expansionary policy. For its part, the central bank has said that it is
satisfied with recent inflation trends and has greater leeway to improve liquidity conditions gradually going forward.
A slow start of year
Losing speed
Despite distortions due to the Chinese New Year, economic activity indicators as
a whole clearly point to an inflection in real GDP growth, which is expected to be
below 8.5% year-on-year in Q1, compared with 8.9% in Q4 2011. Industrial
production grew 11.4% YoY in the first two months of 2012 (graph 1). This
figure, to be compared with the average growth rate of 13.9% in 2011 and 15.7%
in 2010, points to a sharp slowdown in manufacturing activity, hampered both by
a weakening in foreign demand and moderation in domestic demand.
Amid an unfavourable global environment, export performance not surprisingly
remained mediocre in the first three months of 2012. Exports grew only 7.6%
year-on-year (versus 14.3% in Q4 2011), constrained mainly by the contraction
in sales to EU countries (-1.8% YoY). Although China is currently experiencing a
rise in its production costs (increasing wages, real appreciation of the yuan,
rising energy costs), it has apparently not yet lost market share. The country still
accounted for 10.6% of total world exports over the period January-November
2011, like in 2010.
Imports posted 7.3% YoY growth in January-March 2012, versus 20.6% in Q4
2011. This slowdown has moved in step with the slowdown in exports and
domestic demand, but is still partially attenuated by growth in commodity
purchases (which account for 30% of total imports). As a consequence, the trade
balance temporarily went into the red in February. The trade surplus measured
as a 12-month moving sum, which is more representative of China's foreign
trade performance, contracted to USD 160 bn at end March 2012, compared
with 185 bn at end 2010 (graph 2). This trend is likely to continue in 2012.
Retail sales growth proved disappointing, slowing to 14.7% YoY in January-
February in nominal terms (11.5% in real terms), versus 17.6% in Q4 2011
(13.0%). This decline is partly due to household purchases brought forward to
December because of the planned removal at end 2011 of certain subsidies on
purchases of household appliances and the relatively early date of the Chinese
New Year in 2012 (23 January). We expect a renewed acceleration of household
consumption in the near future given ongoing revenue growth and the slowdown
in inflation.
Manufacturing investment also slowed, falling from growth rates exceeding 30%
in the second half of 2011 to 21.5% in January-February 2012, and the very
recent fall in profits of industrial enterprises is likely to adversely affect their
investment capacity in the coming months. Real estate and construction
investment growth posted an unexpected upturn, partly stimulated by public
housing development programmes. However, this upturn could be only
temporary given recent trends in the property market: sales fell heavily at the
start of the year; the average housing price has started to decline (-0.1% in
February month-on-month and +0.2% YoY), and a number of real estate
developers face liquidity problems (graph 3).
The authorities prepared to press on the accelerator?
The authorities have shown until now the firm intention of allowing the downward
adjustment in the property market to go on. In the meantime, they will probably
continue with a cautious easing of economic policy, designed to underpin
demand faced with difficult external conditions, while supporting the "structural"
moderation of growth. The government has introduced a series of countercyclical
measures in the past six months, and at the same time announced at the
National Party Congress in March an economic growth target of 7.5% for 2012.
This figure, which is a "direction to be followed" and not a target to be achieved,
had been fixed at 8% each year since 2005.
The announced budget for 2012 projects a general government deficit of 800 bn
yuan, or 1.5% of GDP. The initial budget for 2011 projected a deficit of 900 bn
yuan, or 1.9% of GDP, but the actual budget deficit reached in 2011 was 1.1%,
notably because revenues far exceeded forecasts. The 2012 budget therefore
foresees a de facto moderately expansionary policy. Moreover, the central
government still has comfortable room for manoeuvre, which could lead it to step
up its stimulus measures in the coming months – by maintaining emphasis on
measures designed to encourage private consumption and further industrial
restructuring (tax cuts, welfare spending, investment in education, healthcare
and the water and environment sectors, for example). All in all, we estimate that
the consolidated general government deficit could be close to 2% of GDP in
2012 (graph 4).
The problem of local government debt, a hangover from the 2008-2009 stimulus
package, has to be settled and today represents a constraint on economic policy
(graph 5). Whereas fiscal policy cannot inconsiderately rely on new investment
projects of local governments, the latter have extensive responsibilities in the
areas of welfare policy, utilities and infrastructure development. The authorities
are therefore trying to find solutions designed both to improve local government
finances in the medium term and settle their short-term liquidity problems –
because defaults on their loans would have severe consequences: they would
considerably hamper the conduct of economic policy, they would adversely
affect the credit quality of banks' loan portfolios, and they could feed social
unrest in the regions in question. As a consequence, the central government has
stepped up its monitoring of the financial situation of local governments since
last year and has authorised some "model" cities and provinces to levy a
property tax and issue bonds directly in the domestic market. Pending more
wide-ranging reforms, the authorities recently authorised local banks to carry out
a massive rescheduling of local government loans reaching maturity this year, on
certain conditions of profitability of the projects financed. This decision should
make it possible to loosen the debt stranglehold on local governments in the
short term.
The "moderately expansionary" fiscal policy will go hand-in-hand with "cautious"
monetary policy easing. The central bank has said that it is satisfied with recent
trends in inflation, which fell to 3.2% YoY in February 2012, the lowest rate since
June 2010 (graph 6). Inflation went back to 3.6% in March, again due to food
price pressures (+7.5%), but the slowdown in core price inflation continued
(+1.4%). In this context, the central bank has greater room for manoeuvre, and
will probably continue to improve liquidity conditions via quantitative measures
(further reductions in reserve requirement ratios, open market operations) and
do more to encourage bank lending. All in all, monetary expansion should
nevertheless remain moderate this year, as suggested by the M2 money supply
growth target, which is currently set at 14% for 2012, i.e. a similar rate to 2011.
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