International | Jul 20 2009
By Chris Shaw
With the eyes of the economic world upon it China didn’t disappoint in the June quarter in recording better than expected annual growth for the period of 7.9%, well above the 6.1% recorded in the March quarter. In seasonally adjusted terms the result was even better according to Morgan Stanley, the broker estimating on such a basis growth was 4.5% for the quarter, which compares to the 1.5% growth recorded for the previous quarter and equates to 19% growth in quarterly, annualised terms.
In the broker’s view the result can be put down to the nation maintaining its growth-boosting policy approach that includes the recent stimulus package and expansionary monetary and credit policies, which has allowed stronger growth to flow through faster than had previously been expected.
As an example the broker notes the monetary and credit expansion has driven a strong increase in domestic investment, with 1.53 trillion renminbi in new loans made in June driving money and loan growth of 28.5% and 34.4% respectively in annualised terms.
This has flowed through to very strong credit creation, the broker estimating for the first half of 2009 this measure hit a total of 7.37 trillion renminbi, which is three times the amount for the same period last year and more than 50% higher than the total for all of 2008. This in turn has helped finance growth in fixed asset investment of 35.5% in yearly terms in the June quarter.
Factoring these numbers in sees the broker lift its growth forecasts for China to 9% for 2009 from 7% previously, while in 2010 it expects a further increase to 10% growth, up from its earlier forecast of an 8% increase.
As well as revising its growth numbers the broker has also updated its growth component forecasts, with consumption growth in real terms now expected to be 8.5% this year and 9.8% in 2010, which compares to the 8.3% growth recorded in 2008. Manufacturing growth is now expected to hit 9% this year against the broker’s previous forecast of a flat outcome, rising further to 12% in 2010 as better exports lift profitabillity. This improvement in exports is expected to begin in the final quarter of this year and should see growth of 9% in 2010 against a 16% decline expected this year.
This all flows through to changes to the broker’s quarterly growth trajectory, with growth now expected to return to more sustainable levels of 2.0-2.5% in coming quarters as the June quarter rate of 4.5% doesn’t appear sustainable. Into 2010 growth should decelerate to high single-digit levels, reflecting stronger private consumption, investment and exports but offset by lower levels of policy stimulus.
Supporting the increases in the broker’s view is the domestic policy responses have been enough to see the domestic economy able to withstand the external economic shocks, which appear most obviously in the ongoing decline in export activity.
This pick-up in domestic demand, along with some re-stocking in the manufacturing sector has in the broker’s view put industrial output on a much firmer footing, as evidenced by this measure coming in well above expectations in the June quarter at 10.7% against forecasts of about 9.5%. With electricity generation also turning positive for the first time since last October in what is an indication of increased production in power intensive sectors, the domestic demand side of the economy appears to be leading the way.
What this means in the broker’s view is China, by virtue of its strong policy response to the global financial crisis, has effectively decoupled from the global economy. Its policy response, and the strong financial position that allowed such a response, has brought about the ideal scenario of asset reflation underpinning investor and consumer confidence, meaning a shallower trough in the cycle.
This is followed by a recovery in domestic demand at first and then gradually in external demand, the former coming a little faster than the broker had expected but setting the stage for the economy to grow despite the latter continuing to be weaker than had been forecast.
Looking ahead, the broker expects current policy will fuel rapid investment growth and while infrastructure spending should slow next year given this year’s high base on the back of the stimulus package, this will be offset by an expected strong increase in property investment in 2010 and ongoing gains in private consumption, consumer confidence and employment levels.
A further boost should come as exports recover somewhat next year, while stronger profits should also support non-property related private investment in the broker’s view, allowing GDP growth to peak in the first quarter of 2010 before subsequently moderating.
In terms of risks to its revised numbers, Morgan Stanley suggests external demand remains the major issue as regardless of the levels of domestic policy stimulus, China cannot fully decouple as long as the country remains strongly integrated in the global economy and here the outlook is far from certain.
While the broker expects both the US and Europe to return to positive growth by the December quarter of this year and recover further in 2010, there are question marks as to how sustainable any recovery will be next year. Assuming a stronger than expected recovery in world growth, there is upside risk to its China numbers next year, while a double-dip recession as some have been forecasting would mean its new estimates will turn out too high.
Either way inflation is unlikely to be a problem in China in the group’s view at least for the next year as lower exports have a deflationary or dis-inflationary impact on China overall as this increases the negative output gap.
As well, the broker doesn’t see great upside in commodity prices in coming months and this too has positive implications for prices in China especially in producer price index (PPI) terms and a low PPI means downward pressure on consumer prices (CPI). On its forecasts, inflation in China in 2010 should be something around 2.5%.
On a 12- month view then the broker sees a period of stronger growth and low inflation, which should drive further asset price reflation. Some strengthening in inflation pressures in the second half of 2010 could weigh on market sentiment as it suggests some tightening in policy, but in the broker’s view this should be offset by stronger corporate profits and so see organic growth continue at solid levels.