International | Apr 17 2013
– China's March quarter growth disappoints
– 2013 forecasts now downgraded
– Rebound possible in the June quarter
– Downside risks remain
By Greg Peel
China’s March quarter GDP result disappointed economists and sparked stock market sell-offs, including in Australia and the US. The assumption was that the Chinese economy had stopped slowing down towards the end of last year and had returned to a level of expansion. Stronger Chinese economic growth in 2013 has been fundamental to forecasts of global growth.
Economists have been forced to reassess their ongoing forecasts.
China’s March quarter GDP annualised growth rate of 7.7% was down from the December quarter’s 7.9% and below a consensus forecast of 8.0%. Quarter on quarter, March grew by 1.6% compared to December’s 2.0%. A breakdown shows consumption contributed 4.3% growth, investment 2.3% and exports 1.1%.
Beijing does not employ seasonal adjustments in its quarterly GDP numbers, as developed economies do, and it is the March quarter which usually includes the week-long Lunar New Year holiday break. This break distorts the numbers given frenetic activity in the lead-up, no activity but much spending in the break, and a hangover followed by gradual return to business as usual thereafter. While foreign economists make their own attempts to smooth for this seasonal anomaly, they still get caught out by it given the impacts are always hard to judge.
Beijing gets around the anomaly to some extent by releasing January and February as one “monthly” data period, with March a standalone. But the 2013 New Year fell in February, which is not usual and thus more confusing. Looking at the regular data for the month of March, industrial production growth (year on year) came in at 8.9% compared to 9.9% in Jan-Feb. Retail sales growth rose to 12.6% in March compared to 12.3% in Jan-Feb, and fixed asset investment came in at 20.9%, down from 21.2%.
On first glance the real culprit here appears to be industrial production, and Deutsche Bank suggests the GDP “miss” for the quarter can largely be attributed to the fall in IP in March when a rise to 10% growth was expected. In the heavy manufacturing sector, steel, power and telco equipment showed the most weakness while weakness in light manufacturing was likely most attributable to food manufacturing, Deutsche suggests, given the bird flu scare and a government crackdown on corruption.
Deutsche finds the retail sales and fixed asset investment numbers to be broadly in line with expectations. Within FAI, the economists point to a deceleration in real estate investment growth to 17.6% in March from 22.8% in Jan-Feb, which may be explained by the introduction of a 20% capital gains tax from March 1 in some areas.
While retail sales growth improved slightly in March from Jan-Feb, the March quarter retail sales growth result of 12.4% is down from 14.5% in the December quarter. Here Deutsche points to lower growth in auto sales, and also to the anti-corruption campaign.
Given the importance of food vending in China, this anti-corruption campaign from the government, while laudable, is clearly causing a bit of a disturbance. The impact will not recede anytime soon, but as Deutsche notes it is the practice of the government to balance what is effectively fiscal cutting in one sector with fiscal spending in some other sector. Thus Deutsche does not expect the net impact to last long. Nor do the economists expect the bird flu impact to play out for too long either.
Despite the weak March quarter result, Deutsche still expects a gradual recovery in GDP growth in the coming quarters. Manufacturing profit has been growing in the past few months, which should translate into a recovery in the manufacturing sector, and land sales are up 50% year on year, meaning real estate investment should pick up. Infrastructure spending has fallen into a vacuum during the transition from the old ten-year regime to the new, but this should return now that the new government is settling in.
For JP Morgan, the quarter on quarter fall in retail sales growth is the more obvious reason as to why the GDP was so weak. In general, the JPM economists are surprised by weaker domestic activity given very strong credit growth in March. The fall in retail sales can be attributed to a fall in growth in the disposable real income of urban households to 6.7% in the March quarter from 9.6% in 2012, the slowdown in inflation, and another government crackdown – this time on extravagance in public expenditure.
It is nevertheless confusing that consumption should grow 4.3% in the March quarter, better than 4.1% for 2012. What this suggests to JP Morgan is that the Chinese government is facing a very big challenge, being the decline in “investment efficiency”. The fixed asset investment numbers remain “decent” but overcapacity is still significant in some areas such as steel, cement and others. The large scope of government investment, plus investment from state-owned enterprises, is preventing access to investment opportunities for the private sector and thus undermining the opportunity to maximise investment returns.
JP Morgan is lowering its 2013 GDP growth forecast to 7.8% from a previous 8.2%. This splits into annual growth rates for the remaining three quarters as 8.0%, 7.9% and 7.7% respectively. As is clear, the economists are expecting a good bounce in the June quarter but a taper-off thereafter. This is despite an expectation of an improvement in the global economy in the second half of 2013, which should improve China’s trade activity. They do not expect any immediate policy changes from Beijing on the strength of the March quarter numbers.
JP Morgan suggests China will continue the long-term downward trend in its growth potential. Note that this implies falling growth and not actual contraction. “As the structural adjustment in the economy goes on,” the economists suggest, “over-capacity in a number of industrial sectors remains overwhelming, restraining the pace of cyclical recovery”.
The National Australia Bank economists have lowered their 2013 GDP forecast to “slightly below 8%” from 8.2% previously. NAB highlights the slack in private demand despite government efforts to jump start the economy last year. Although the economists note weaker inflation provides scope to further stimulate the economy in the second half if needed, they suggests risks have become “much more heavily skewed to the downside”.
Beijing’s target growth rate for 2013 is 7.5%, but in recent years actual growth has always come in ahead of each year’s target figure. A 7.7% growth rate may prompt Beijing to roll out further stimulus lest twelve month growth threaten to fall below 7.5%, but the accompanying comments to the GDP result release suggested Beijing was relatively happy with this “stable” outcome, as NAB notes.
On the other hand, solid additions to new credit in the March quarter and some healthy forward indicators suggest to NAB economic activity may still pick up. Marginal improvements have been seen in recent PMI releases (purchasing manager’s index) including improved domestic and international new orders, suggesting a modest pick-up in manufacturing in coming months. Yet electricity data – controversial but oft used as thumb nail indicator of the underlying strength of the economy – are looking similar to last April when “hard landing” talk was prevalent.
Growth in real estate investment was solid in Jan-Feb but weakened off in March. This likely reflects a rush to invest before new regulations and taxes came into force in March and suggests a slowdown from here on. However, Beijing’s social housing program should keep construction ticking over, NAB suggests.
ANZ Bank economists are also concerned over property “front-loading” in the March quarter which may serve to dampen GDP growth in the June quarter. ANZ is also a little more concerned about the bird flu breakout, providing scope for a spike in food inflation on a sharp decline in pork and poultry supply, but also likely to have an impact on the May Golden Week holiday season which could slash tourism and domestic consumption.
There is also the issue of slowing investment momentum, indicated by a sharp decline in newly started projects into the new year. ANZ also cites the government’s intensified efforts to reduce air pollution as no doubt impacting on heavy industry, and crackdowns on corruption and official extravagance as impacting on retail sales.
Beyond that, ANZ believes growth momentum should otherwise pick up in the June quarter given strong total social financing from the government in the March quarter and robust investment growth.
ANZ is forecasting 8.1% annualised growth in the June quarter, 8.0% in September and sub-8% in December for a 2013 average of 7.8%.
If the ANZ economists were in control in Beijing, they would stop “liberalising” the capital account by opening it up to foreign capital inflows, given evidence suggests a lot of these “foreign” inflows are actually funds from the mainland being transferred to Hong Kong to exploit higher renminbi interest rates before being transferred back again. Instead they would “liberalise” the domestic financial system by being less repressive and addressing interest rate differentials. Otherwise monetary policy initiatives become less and less effective, the economists warn.
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