China Economic Highlights
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14 Mar. 2014
The China Weekly: Your “Eyes and Ears” on Important Economic News of the Week
Rating for MNC’s: NEGATIVE
Disappointing Jan-Feb data confirm a weak start to 2014
Various Chinese agencies released monthly economic data this week, and it is now clear that China’s slowdown deepened in the first two months of 2014. Industrial production, the indicator that most closely tracks overall GDP growth, dropped sharply to an 8.6 percent y-o-y average growth in the first two months of the year, down from 9.7 percent growth in December and an average 10 percent growth in Q4 2013, when GDP growth eased to 7.7 percent. Headline fixed asset investment fell to 17.9 percent y-o-y for the first two months of 2014 from 19.6 percent for all of 2013. Meanwhile, retail sales of consumer goods (a nominal measure), which had been holding up reasonably well in the midst of the slowdown, eased to 11.8 percent y-o-y growth in the January-February period, down from 13.6 percent in December.
Export data was particularly weak, with shipments abroad contracting at -18.1 percent y-o-y in February, down from 10.6 percent growth in January. The two-month average stands at a contraction of -1.7 percent. So while some of the weakness in February was likely payback for stronger-than-expected January performance as exporters brought forward shipments ahead of the Chinese New Year Holiday week (January 31 – February 6), the two-month average shows that there is currently some fundamental weakness in the export environment. Furthermore, exports to every large market contracted in the month – Japan, EU, U.S., ASEAN, HK, Brazil. Nevertheless, at the NPC last week, the government announced a 7.5 percent target for trade growth this year. The target will be difficult to achieve.
Which brings us to the currency. The USD-CNY exchange rate continued to depreciate throughout the week, falling 0.16 percent from last Friday. The central parity was set at 6.1246 USD-CNY on Friday, up from 6.1312 on Monday (a rise in the fixing equals a depreciation of the renminbi). We do not believe, as do some analysts, that the depreciation of the currency is an explicit move to aid the ailing export sector. Recall that in the grand scheme of things, China’s 1.15 percent depreciation over the past four weeks is a drop in the bucket compared to recent downward movements in most emerging market currencies (and some advanced economy currencies, e.g. the Japanese Yen). Therefore, the RMB’s movement so far is nowhere near enough to change the game for exporters. The PBoC seems to have tipped over the first domino by devaluing the currency suddenly, back in mid-February. But since that time, weaker domestic growth, a large trade deficit in February, the unwinding of previous carry trade positions, and changing expectations have combined to create a truly market-driven depreciation. The PBoC is accommodating some of the pressure by raising the fixing but it is now defending the trading band against more rapid declines in the currency that the market is attempting to impose.
These moves have translated into abundant on shore RMB liquidity in recent days as institutions are now selling RMB to buy dollars. The 7-day repo rate hit its lowest point since August of 2010 on Wednesday at 2.22 percent, down from 3.52 percent at the end of February – even as the PBoC withdrew 40 billion RMB from the banking system this week, the fifth consecutive weekly net withdrawal. But even with an abundance of liquidity, overall lending in February was much lower than expected, coming in at 939 billion RMB. The slowdown was mainly caused by non-bank lending. RMB-denominated bank loans grew by 645 billion RMB, but other categories of TSF grew by only 294 billion – leading RMB-denominated loans to comprise 69 percent of TSF, the largest proportion in seven months. The slowdown in entrusted lending in particular and non-bank lending more broadly may be connected to the currency’s depreciation, as a more expensive dollar makes speculating in China’s shadow banking market less profitable for domestic corporates (and other players).
So while the currency movements and their relation to onshore lending is causing complex and somewhat unanticipated reactions in financial markets, one thing is clear: the slowdown in economic growth has deepened across the board so far this year. And the permanence of the slowdown – as we have forecasted – is becoming apparent. These developments make it likely that China’s growth will dip below 7.5 percent in the first quarter of 2014. That data point should be confirmed in mid-April, only weeks after the government has reiterated its 7.5 percent growth target for the year. This situation gives further credence to the notion that the leadership will have to revert to stimulus, by turning on the credit taps and ramping up investment, if it wants to achieve the 7.5 percent target. As such, various avenues of economic reform are likely to be subordinated to that goal.
We’ve asserted for some time that 2014 will look a lot like 2013 in China (from an economic growth and reform standpoint) but slightly worse – meaning the State-vested portion of the economy will require more support, the growth path will become even more policy-dependent than last year, reform will continue to move at a snail’s pace lest it undermine top-line growth, and the business environment is likely to remain distorted by State intervention to prop up weak boats in the sinking tide. So far the data bear that story out.