China’s economy has bottomed out – economists

16 january 2013

BEIJING – Digesting recent economic numbers, financial institutions across the globe have reached a general consensus: China’s economy has bottomed out.

Data released last week by the National Bureau of Statistics showed that China’s economic growth slowed to an annual rate of 7.4 percent in the third quarter. However, September data indicated a pick-up in economic activity.

“While news headlines highlighted this as the lowest growth in 14 quarters, we think the economy bottomed out in the first half of the year,” UBS economists, headed by Tao Wang, wrote in an research note.

Economy stablizing

Third-quarter gross domestic product growth and better-than-expected September data suggest economic growth is stabilizing, according to Barclays.

“Overall the September data release painted a consistent picture of a pickup in domestic activities on the back of recovering domestic and possibly external demand, as well as accommodative monetary and financing conditions,” Barclays economists, lead by Huang Yiping, wrote in a research note.

Bank of America Merrill Lynch (BAML) said that “7.4 percent GDP growth in Q3 could mark the trough”.

BAML economists wrote in a note, “Now we are seeing an increasing amount of evidence for green shoots. This evidence comes from a wide range of sectors including transportation, commodity, exports, property market, credit and money data, tourism during Golden Week and restocking by manufacturing companies.”

In March, China for the first time set its growth target below 8 percent in a move to chart its economy towards a more balanced and inclusive one. But worsening conditions in the following months raised worries that the world’s second-largest economy was at risk of a hard landing.

Big-bang stimulus unlikely

Robust monetary policies have been deemed vital to stimulate the economy, in the wake of bond-buying from the European Central Bank and Quantitative Easing from the US Federal Reserve.

But after two interest rate cuts in June and July, the People’s Bank of China (PBOC), or the central bank, has refrained from bold actions as market sentiment hit perhaps the lowest point since the global credit crunch. This is widely read as guarding against inflation and a resurgent real estate sector.

The reserve requirement for large Chinese banks stands at 20 percent, unchanged since a 0.5-percent cut in May, while the central bank repeatedly resort to the lesser-significant reverse repurchase operations.

Now with an ongoing recovery, economists said big bangs from the central bank would be more unlikely.

The rebound suggests that current policy settings are effective in boosting growth and so the government may hold off on further interest rate and reserve ratio cuts, said Alaistair Chan, economist at Moody’s Analytics.

Given that growth seems close to trend, there is less need for stimulus, he added.

This is echoed by other economists.

“While the PBOC’s preference of reverse repos to inject liquidity could further delay the need to cut bank’s reserve requirement.” Barclays economists said.

Wei Yao, China Economist with Societe Generale, put the chance of another interest rate cut by the end of this year at “probably close to zero”.

Old worries persist

Official data also showed that the real estate market was recovering. UBS noted that property sales rose 6 percent year-on-year in the third quarter, compared to a 7.7-percent decline in the second quarter.

Developers were accelerating completion and pushing more projects to the market, and strong property sales seem to have led to a pickup in retail sales of furniture and construction materials as well, it added.

The recovery was good news for the broader economy. But the Chinese general public have long complained about unaffordable urban housing prices, which many economists said is tying the hands of decision makers.

With robust retail sales in September and the tourism boom during the National Day holidays, a growth pattern powered more by consumption and less by heavy industry is emerging, indicating a slowly rebalancing Chinese economy.

“September’s retail sales saw the biggest year-on-year increase since March,” noted Fitch Ratings.

Numbers like these “might be more real than what’s perceived by bears who are focused too much on power usage and industrial production,”  observed BAML, pointing to a shift of consumption toward leisure, a new source of demand.

But taking the data as a whole, the country’s major engine of growth remains old-fashioned.

“It seems that while people are searching for signs of China’s consumption taking the lead, it is the good old exports and investment that might lead the recovery again, at least in the short term,” said UBS.

In the long term, China needs to further re-balance, although it is too early to conclude that this process will proceed quickly or smoothly, said Fitch Ratings.