China achieves soft landing, now for the recovery

Chinese economic data was weaker than expected; the Chinese economy grew at an 8.1 per cent annual rate in the March quarter (consensus 8.4 per cent) down from 8.9 per cent in the previous quarter, the slowest annual growth rate in 2½ years.

• Retail sales in March were up 15.2 per cent on a year ago (consensus 15.1 per cent); industrial production was up 11.9 per cent (consensus 11.6 per cent); and fixed asset investment over the first three months of 2012 was up by 20.9 per cent (consensus 21.0 per cent).
• GDP fell short of more lofty expectations so Aussie dollar eases from US104.4c to US103.95c
• Scope to ease policy. The slower pace of growth combined with other data showing that inflation is in control gives the Chinese authorities’ scope to ease bank reserve requirements.

What does it all mean?

• The latest Chinese growth numbers have fallen short of the lofty expectations that were doing the rounds in the last 24 hours. And while there may be a degree of disappointment in the result, an all-encompassing view needs to be taken into account.
• In fact there are encouraging signs across an array of indicators. In particular the strength in bank lending and money supply growth is a big positive. Chinese banks lent over 1 trillion Yuan in March – the highest result since January 2010. Such strong growth in credit will only lead to stronger domestic consumption in the medium term. In addition retail sales and industrial production remain healthy with the latter growing at a 1.22 per cent pace March – the fastest pace of growth since June 2011.
• There is no doubt the Chinese economy has slowed down over the past year, however it has been a self-induced slowdown to get inflation in check. And that is exactly what has taken place; non-food inflation is barely growing, while prudent policy has resulted in food inflation also easing in recent months. In addition producer prices (or business inflation) is now going backwards, recording the first annual fall in prices in 29-months.
• Chinese policymakers deserve a pat on the back. Chinese economic growth of around 8 per cent, strong lending statistics, healthy domestic consumption, robust business investment and inflation below 4 per cent sound like the ideal economic landscape for a sustainable growth story. In short, Chinese authorities have successfully engineered a “soft landing” for their economy.
• Looking forward, there is now greater scope to ease monetary policy – largely a lowering of the required reserves that banks need to hold at the central bank. At present Chinese authorities are being careful not to crank up growth too quickly. But a staged lowering of reserve requirements would clearly be positive for Australian resources companies. Engineering a slowdown is a useful feat but the trick is not to let the downward momentum go too far.

What do the figures show?

• The Chinese economy grew at an 8.1 per cent annual rate in the March quarter (consensus 8.4 per cent), down from 8.9 per cent in the previous quarter. For the March quarter GDP grew by 1.8 per cent after rising by 1.9 per cent in the December quarter, 2.4 per cent in the September quarter, 2.3 per cent in the June quarter and 2.2 per cent in March quarter 2011.
• Industrial output expanded at an 11.9 per cent annual pace in March, up from 11.4 per cent in January-February and above forecasts centred on a result near 11.5 per cent. Production is well off the highs of 20.7 per cent annual growth in January/February 2010.
• Industrial production rose 1.22 per cent in March – the fastest pace of growth since June 2011.
• China’s urban fixed asset investment, such as spending on roads and power plants, grew at a 20.9 per cent in 2012 to date (January – March), modestly below forecasts (21.0 per cent) and down from 21.5 per cent in February. Investment growth is the slowest in over 9 years.
• Retail sales grew at a 15.2 per cent annual rate in March, up from 14.7 per cent in January-February and above forecasts, centred on 15.1 per cent annual growth. Retail sales rose by 1.18 per cent in March.
• National real estate development investment rose by 23.5 per cent in March, down 4.3 percentage points on the January-February result. Residential investment of 744.3 billion Yuan, was up 19.0 per cent, down 4.2 percentage points.

Data released earlier in the week

• Money supply (M2) grew at a 13.4 per cent annual pace in March, up from 13.0 per cent in February and above market forecasts centred on growth of 13.0 per cent.
• New Yuan lending was 1.01 trillion Yuan in March, above February’s 710.7 billion and below forecasts of 797.5 billion Yuan.
  The annual rate of consumer price inflation rose from 3.2 per cent to 3.6 per cent in March. Over the month prices rose by 0.2 per cent after falling by 0.1 per cent in February.
• Food prices were up 7.5 per cent on a year ago (6.2 per cent in February), while non-food prices rose from 1.7 per cent to 1.8 per cent in March.
• Producer prices (business inflation) fell by 0.3 per cent in the year to March (27-month low), down from the unchanged reading in the year to February. Producer prices rose by 0.1 per cent in the month.
• China’s trade balance rebounded in March. The trade balance improved from a deficit of US$31.48 billion in February to a surplus of US$5.35 billion in March and was well ahead of expectations centred on a deficit near US$3.15 billion. Exports were up 8.9 per cent on a year ago (consensus +7.0 per cent) while imports were up 5.3 per cent (consensus +9.0 per cent).

What is the importance of the economic data?

• China’s National Bureau of Statistics releases its monthly economic statistics around the middle of each month. Quarterly GDP data is released around the 16th of January, April, July and October. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications for interest rates and investors?

• The latest Chinese economic data is encouraging for Australian businesses. China has successfully slowed its economy to a more sustainable growth rate. Now the challenge is to lift momentum, but not so far as to reignite inflation.
• China faces challenges – what country doesn’t. A key challenge is to rebalance growth in favour of household spending and the keep inflation under control.
• The Chinese economic data will alleviate global concerns that the world’s powerhouse economy was at risk of a hard landing.
  Some will be disappointed that economic growth fell short of lofty expectations near 9 per cent, but the actual outcome is far more positive from the context of sustainability.
• On top of the latest Australian employment data, at the margin the latest Chinese data waters down prospects for a rate cut in Australia in May. We still believe the RBA should cut rates to reignite momentum in our economy.