International | May 14 2012
– Beijing cuts RRR
– April data surprisingly weak
– More to come ahead of expected recovery
By Greg Peel
China, like Australia, is in the enviable position of having plenty of scope to move on monetary policy to combat both economic slowing at home and wider macroeconomic risks. It is of little doubt ongoing weakness in Australia's domestic economy and a peaking of the terms of trade has caught the RBA on the hop, and Europe is of course an ever present danger. Hence the big 50 basis point cut this month.
JP Morgan's Asia Pacific economists suggest Beijing has also been a bit slow to move on the policy front. While Saturday's 50 basis point cut to the bank reserve ratio requirement (RRR) to 20% (18% for smaller banks) surprised no one, JPM sees the Chinese government as also caught somewhat on the hop by the particularly weak April data. Westpac offers the explanation that a soft March quarter was mistakenly interpreted by forecasters as the trough ahead of a pick-up in activity as the year plays out. The April data suggests the June quarter will also be one of weakness before an expected recovery, aided by monetary easing, becomes apparent in the September quarter.
Friday's monthly “data dump” showed a timid 14.1% year-on-year increase in China's retail sales, impacted by a hike in the official petrol price and an increase in stamp duty. Industrial production was more alarming, growing by only 9.3% (yoy) in April – the slowest rate since March 2009. The previous month marked 11.9% growth and economists had pencilled in 12.2% for the April result. China's M2 money supply growth decelerated to 12.8% (yoy) in April from 13.4% in March.
Beijing is playing a difficult balancing game in trying to crimp the Chinese property market without stalling the overall economy. Weaker export demand from Europe is not helping. In the period January to April, Chinese residential property investments rose by 19% (yoy) which looks pretty solid on anyone else's terms, but that figure is down from 36% in the same period last year. The government is attempting to encourage owner-occupier home purchases with mortgage discounts and swifter approval processes, Westpac notes, while discouraging property investor speculation. But prospective home buyers have become canny, choosing to await better offers from developers and further policy moves.
At least Beijing has seen one problem removed from the equation for the time being – that of inflation. This time last year the government was unable to move too quickly on monetary easing despite falling export demand from Europe given uncomfortably high inflation levels. Food inflation was the biggest problem, but this year food price pressures have eased. April's headline CPI dropped to 3.4% from 3.6% in March and numbers well into the sixes last year. Core (ex food and energy) inflation remains at a comfortable 2%.
On the other hand, the government is learning that a shift to more liberalised investment markets comes with its own issues. The Chinese are now heading down a similar path to that trod by the Japanese over many years, seeking to eschew low interest bank deposits for more attractive wealth management options. This trend is sucking deposit funds away from the banks and reducing the immediate effectiveness of RRR cuts intended to free up further bank capital for lending.
Westpac also suggests that recent resilient readings on Chinese purchasing managers' indices (PMIs) have fooled both the market and the government into believing activity is a bit stronger than the data have shown. Like everyone in the developed world, the Chinese have looked across to Europe with a deal of trepidation, resulting in a low ebb of sentiment for businesses and households. The RBA may well have assumed that its two 25bps cuts late last year would be enough to restore domestic confidence, but is was not to be. The People's Bank of China had made cuts to the RRR earlier this year and late last year and it, too, will have conceded a lesser impact than hoped.
As to whether the RBA's big cut will restore confidence remains to be seen, and at the consumer level its impact will be clouded by the government's fiscal splurge on school kid handouts. Few economists believe Beijing can now rest on its laurels, with this RRR cut not expected to make a notable near-term difference. The good news, however, is that economists continue to anticipate an ultimate pick-up in the Chinese economy in the second half of 2012, with some help from further policy easing.
This would be a very welcome development from Australia's point of view. April is normally a month in which China restocks raw materials, but volumes actually decreased last month. The weaker Chinese housing sector is a clear factor. It will be fingers crossed for a pick-up in Chinese demand sooner rather than later.
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