International | Feb 09 2010
By Andrew Nelson
Chinese economic growth remains on the war path, with both export growth and CPI inflation readings surprising well to the upside by a sizeable margin in December 2009. While the news is further positive proof that Chinese domestic growth remains on the fast track, external demand was a big feature of the results, indicating economic recovery in many of the nation’s trading partners is picking up as well.
Morgan Stanley economists Qing Wang and Steven Zhang note that while the stronger than expected export growth in December reflects the low base the reads are cycling from, they are also consistent with the improving trends of the OECD leading indicator. The strength of China’s exports also reflects increasingly strong demand from emerging markets, which combined now account for nearly 50% of China’s total exports, say the pair.
The economists note the depreciation of the RMB also probably contributed to the jump in exports, with Morgan Stanley estimating the RMB trade weighted exchange rate has depreciated by nearly 6% since the end of March 2009. The currencies of China’s main trading partners have appreciated against the USD considerably, while the RMB remained pegged to the USD at around the rate of 6.83.
Despite the red flag that has been raised by Chinese authorities in recent weeks, Wang and Zhang think that, overall, the policy environment in 2010 will be more about normalisation, rather than the outright tightening the market seems to be fearing. In fact, the two predict that there will be about RMB7.5trn in new loans made in 2010, which they note was recently confirmed by the bank regulator as the target amount. Such a level would imply 19% year on year loan growth.
And as long as this target amount for new loans remains unchanged, then the team thinks Chinese domestic credit conditions should be supportive of growth. On top of that, the two estimate that about RMB1.0-1.5trn out of RMB9.5trn in loans made in 2009 has not yet been fully put to use and is therefore still available for 2010. Thus, the effective amount of new bank lending in 2010 could amount to RMB8.5-9.0trn, which is certainly more than the RMB8.0trn that was doled out in 2009.
All of this leads the team to predict both monetary and credit conditions will remain supportive of the Chinese economy this year, while private consumption should improve steadily through 2010 as consumer confidence and employment continue to improve. In fact, new data see Morgan Stanley upgrade its GDP growth forecasts for China to 11% (from 10%) in 2010. 2010 export growth has been boosted to 15% from 9%, while import growth rises to 18% from 10%, partly to reflect the high imported content of China’s exports.
The spectres of policy uncertainty, China’s traditional lack of transparency and the cat-and-mouse game going on between commercial banks and the authorities will likely weigh on market sentiment in the near term, much more so than any actual policy tightening, suggests Morgan Stanley.
But even with the economic growth and inflation mix looking less benign for 2010, the economists believe the fundamental strength of the Chinese economy will remain intact.