China joined Europe and the US this year as a source of consternation for investors with growth slowing more than expected. This fuelled fears about a hard landing (growth of 6% or less) and a focus on China’s long-term problems. Such fears have been accentuated by the leadership transition.
So what’s going on in China: has growth bottomed and about to rebound or is a hard landing still likely? Will the leadership change result in big changes? And what does it mean for Chinese shares, which have been in a bear market since August 2009?
There is no doubt that Chinese economic growth slowed more than expected into mid-year. However, there is still no sign of a hard landing. After a few false starts, recent indicators suggest that growth may be bottoming.
While year ended GDP growth slipped to 7.4% in the September quarter, quarter on quarter growth has risen from 1.5% in the March quarter, to 2% in the June quarter and to 2.2% in the September quarter.
Source: Thomson Reuters, AMP Capital
Related to this, business conditions indicators (or PMIs) have stabilised or improved pointing to a possible pick-up in growth. See the previous chart.
Retail sales rose 14.5% year on year in October, up from a low of 13.1% in July. Real retail sales are tracing out a gentle rising trend. This is being fuelled by strong growth in disposable incomes, particularly in rural areas.
Source: Thomson Reuters, AMP Capital
New home sales rose 25% year on year in October, the fastest pace since March 2010. House prices have also been edging up since May. The bounce back in property demand, despite ongoing property restrictions, highlights that underlying demand remains very strong. In a country where only 11% of property buyers are investors, average deposits are around 40% of values and 20% of buyers pay in cash, it highlights that property conditions in China overall are a long way from being in a bubble.
Growth in fixed asset investment is also strong, up 22.2% year on year in October, up from a low of 19% in August. A big driver of the renewed strength has come from infrastructure investment, which rebounded to 25% year on year growth in October as the Chinese Government sped up project approvals and fixed financing bottlenecks. Growth in industrial production has picked up to 9.6% in October, up from a low of 8.9% in August.
The only fly in the ointment has been lending and money supply growth, which slowed in October. However, the trend in both has been up this year, reflecting the monetary easing that commenced late last year.
Source: Thomson Reuters, AMP Capital
Meanwhile, inflation is back under control. Having peaked at 6.5% last July it has fallen to 1.7%. Inflation is no constraint to further monetary easing. Chinese export growth has also picked up to 11.6% year on year in October from a low of 1% in July. This is also consistent with an upturn in exports from other Asian countries, including Korea.
Source: Thomson Reuters, AMP Capital
A big concern in recent years is that China will have a hard landing. The basic argument has been that China has overinvested leading to a surge in debt, that a credit crunch was on the way and thanks to high inflation the authorities would be too slow to respond and the economy would implode as the property market and investment collapsed. As it is, none of this has occurred. The growth slowdown looks more by design than accident. Inflation has cooled providing plenty of policy flexibility and property and investment have slowed but not collapsed.
The range of indicators referred to above suggests growth may have bottomed and is likely to come in around 7.5% this year. By the same token, for 2013 it’s hard to see growth accelerating much beyond this, given that the soft global backdrop will likely constrain exports and policy stimulus has not been strong enough to drive a renewed growth surge. So no hard landing, but no growth surge either.
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