China recently released its major regular economic data dump, and the results were well, remarkably good. GDP growth tapered off ever so gently, retail sales growth accelerated, industrial production chugged along, fixed asset investment slowed slightly, trade volumes held up, property prices continued a gentle descent, and loan growth showed a cautious but somewhat easier pace, and inflation continued to ease-off. In essence the December data was consistent with a smooth and steady landing, with all the right spots showing the right signs. But where to next? Can we expect a continued pleasant ride, or are we on the cusp of turbulence? And what are the implications for investors?
1. GDP Growth - Tapering off ever so gently
GDP growth came in at 8.9% y/y in Q4, or 9.2% for the year. This is below the 10-year average of about 9.4%, but within the achievable somewhat sustainable rate of around 8 or 9 percent a year. GDP growth will probably slow a little further before consolidating later in the year, with 2012 growth likely around 8.5%
2. Inflation - As expected, inflation is down ...
Down yes, but not out. Most of the indicators that predict inflation in China have tracked downwards, and so too has headline inflation, but core inflation remains above the 10 year average, and this is the number one reason why we are seeing a controlled and purposeful constraining of the Chinese economy by authorities. Basically higher inflation means downward pressure on real wages and raises the risk of "mass events," thus inflation remains a barrier to stimulus for now.
3. International Trade - Exports higher, check; imports higher, check.
The full year trade numbers showed exports and imports reaching all time highs, but a great fact is that imports grew faster, both proportionally and in absolute terms, than exports - rebalancing much? Anyway, the dip in the surplus was a drag on yoy GDP growth, and the rise in imports is a very positive trend for those who supply the Chinese industrial and construction growth engine.
4. Retail Sales - Stronger for longer
On a closely related note, retail sales growth came in very strong (even after factoring in seasonal effects), with the long-phase amplitude showing steady momentum. This is a positive signal on the rebalancing/domestic driven growth front, and this area will likely gain more if growth slows further as the Chinese authorities have signaled that any fiscal stimulus is likely to have due emphasis on the consumer, as opposed to being investment-centric.
5. Industrial production - chugging along
Meanwhile, one of China's key sources of growth; its industrial engine, continues to chug along. The PMI did dip below 50, but historical patterns show that 40 is the new 50 for China PMI (i.e. the PMI has to drop to around 40 before y/y industrial production growth turns negative), what's more, the recent HSBC flash PMI showed resilience in new orders, and the PMI about flat, if not slightly positive.
6. Property - A controlled landing for now
Property prices have been broadly falling for the past few months, driven by aggressive moves from the Chinese authorities to clampdown on speculation and promote housing affordability - which goes hand in glove with the ambitious social housing program that promises 10s of millions of new housing units built over the next couple of years. The base case would be more price drops, but no free-fall; in real terms prices have already come-off a lot. At some point prices will likely stabilize when the authorities ease-off a bit and as demand returns.
So while there's a few doom and gloom pundits out there (albeit, permabear short sellers would have done OK last year), at the moment all signs are for a continued steady and controlled descent. But what are the risks you say? Europe is still the biggest risk for China, property is less of a risk but may pose some tail risks at the margin through government bad debts affecting the banks. A resurgence in inflation (possibly from a premature QE3 from the U.S. pushing up commodity prices) is also a key risk, and a weaker U.S. economy is also somewhat of a risk (but would likely only come from a euro plop). Other than that, there is a bit of upside potential, especially if the authorities do more to support growth. Chinese equities got sold-off hard last year on Euro-risks, general risk aversion, monetary tightening, and hard-landing risks. So obviously as those risks, and the perception thereof, begin to dissipate/pass Chinese equity market valuations will likely re-rate accordingly. So for the year of the dragon, 恭喜发财! 一本萬利 !
- National Statistics Bureau
- People's Bank of China
- Trading Economics