International | Jan 19 2012
By Greg Peel
In 2011, notes UBS, global financial markets spent their time worrying about whether Beijing might tighten monetary policy too much, whether the Chinese economy might slow too sharply, whether the Chinese property sector might collapse, whether a debt crisis might arise from Chinese local government over-borrowings, and whether Chinese inflation might run out of control. But if the release of China's December quarter GDP result and subsequent 2011 summaries are anything to go by (being, as we know, tenuous in their fact/fiction balance), then we were all losing sleep over nothing.
Indeed, and bearing in mind the Great European Tragedy, Beijing's economic management was masterful.
The December quarter GDP result of 8.9% growth beat consensus expectation and was indicative of a well managed soft landing. This year on year number can nevertheless be a bit misleading and for trend purposes, sequential quarter on quarter growth on a seasonally adjusted basis is preferred by economists. Beijing does publish such numbers, and suggested sequential growth fell from 9.5% in the September quarter to only 8.2% in December, which looks rather a bit more dramatic. However given Beijing has only been calculating such numbers for one year and won't divulge the methodology, economists ignore them and perform their own calculations.
JP Morgan calculates 9.2% sequential growth in December following 8.4% in September and 8.0% in June, completely turning Beijing's numbers on their head. UBS is a little less enthusiastic with 8.5% sequential growth in December but notes this suggests a stabilisation. Whichever numbers you take, we can at least conclude, perhaps, that China's economy is not collapsing.
That's good to know because aside from the concerns listed above, the other major issue is that Europe is China's biggest export customer and Europe is unquestionably destined to slide into recession. Indeed as recession declarations are backward-looking, Europe is undoubtedly in one now. JP Morgan calculates, however, that the 9.2% growth China registered for the year 2011 was made of of 4.7% consumption plus 5.0% investment minus only 0.5% for weaker exports.
It is likely the most recent consumption numbers include a typical boost of front-loading ahead of Chinese New Year, JP Morgan suggests, while increased industrial production likely reflects inventory building. In the meantime, exports to the EU dropped dramatically in the final quarter while the policy-driven housing market correction appeared to be gaining momentum. “Mixed messages,” suggest the analysts, which imply another year of uncertainty.
However JP Morgan's 2012 view is not a weak one given the analysts have now revised up their annual GDP growth forecast to 8.4% from an earlier 8.2% – weaker than 2011's 9.2% but not beneath the dreaded 8.0%. JPM expects China to experience a slowdown in the first half followed by a “strong” recovery in the second half as Beijing's policy measures – now switched to the easing side – have their effect. The analysts see four cuts to the bank reserve ratio requirement (RRR) in the year along with tax cuts and social spending policies.
UBS notes that the Chinese stock market was one of the worst performing in the world in 2011, driven by all the fears listed above. As it was, however, the export slowdown was more gradual and modest than feared, helped by a recovery in US consumer demand and resilience from the more robust of the eurozone economies. Property investment remained strong in 2011 far more so than expected, helped by activity in the smaller cities as well as social housing.
UBS believes the same fears will be held by the world in 2012 as were prevalent in 2011 re China. What will be different will be that the export slowdown will be much more pronounced in 2012 and property construction and prices will be much weaker. The analysts do not nevertheless foresee a property market collapse nor a systemic debt crisis within local governments. Importantly, UBS expects Beijing to continue on its new path of monetary easing rather than tightening (UBS expects 2-3 further RRR cuts) and also expects weaker exports to bottom some time in the first half (shades of JP Morgan here).
BA-Merrill Lynch recalls that back in the September quarter, some economists were warning of sub-8% growth in the Chinese GDP for the December quarter. No wonder the 8.9% result was so warmly received. Looking at 2012, Merrills believes the possibility of reaching sub-8% growth is quite low.
The analysts believe firstly there is a low probability of an external shock. Presumably this means Merrills does not see Europe imploding in a disorderly fashion. The analysts do see an acceleration in social housing spending and an ongoing recovery in infrastructure spending. They also see an easing of fixed asset investment spending from those scary developers and, to match consensus, a continuation of the policy easing Beijing began in late 2011.
RBS analysts qualify that consensus view by suggesting that the soft landing in 2011 as confirmed by the 8.9% final quarter result implies Beijing will not have to suddenly become too accommodative and thus risk a reignition of inflation problems.
RBS had predicted a soft landing in 2011 on the basis that China's domestic demand is now a lot more insulated from weak exports than it was in 2008. The continuation of expansionary fiscal spending, strong enterprise profit growth and ample savings and liquidity were all contributing factors, the analysts suggest. Given a reduction in personal tax rates enacted last September, RBS expects Chinese consumption to play an even bigger role in 2012 than in 2011.
On the flipside, RBS expects a continuing slump in Chinese private sector property construction over the next six months. From Australia's point of view, this will have a flow-on to lower iron ore pricing as the markets shifts to assume flat Chinese steel output in the year, the analysts suggest. However valuations in the local resources sector are attractive in RBS's view so the analysts retain a “modest” overweight to the sector, with a skew towards gold, base metals and rare earths.
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