China in focus
"We expect the government to keep the macro and property policies stable, with no additional easing."
Wang Tao, Head of China Economics Research at UBS Investment Bank, takes a closer look at China’s economic outlook, highlighting a range of key drivers and insights, such as credit impulse trends, government policy stance, and how property activities, as well as structural reforms, may impact upon future growth expectations.
China’s economy has been relatively weak so far in 2013, as strong credit expansion has not yet generated the expected increase in investment activities. With rising corporate and local government leverage, little labor market pressure and existence of excess capacity in some sectors, the government seems to be less focused on cyclical growth boosters and more on structural reforms, which would take time to implement and bear fruit.
We downgrade China’s GDP growth forecast from 8% to 7.7% in 2013
Consumption has been dragged down by slower wage growth in recent quarters and the government’s frugality campaign, export momentum has weakened in the past 2 months, and most importantly, strong credit expansion has so far not generated the expected increase in investment activities. The divergence between credit and real economic growth, in our view, can be explained by: (i) some new borrowing has been used to finance interest payment of old debt by distressed local government entities and corporate, and (ii) companies are unwilling to invest given excess capacity issues and uncertain growth outlook. Compared with our previous forecasts, we now expect a weaker rebound in Q2 activities and smoother trajectory for the year, slower growth in fixed investment despite the continued rapid growth in credit and a smaller contribution from net exports. We expect the government to keep the macro and property policies stable, with no additional easing such as rate or RRR cuts, nor significant tightening on property and credit.
Credit expansion should slow down in the coming months on tighter regulations
Credit growth remained strong in April, with growth of TSF outstanding (excluding equity) accelerating to 22.7% year on year from 22% in March, though the momentum of credit impulse has peaked. We think the government may continue to tighten regulations and supervision, resulting in a slower credit growth in the coming months, and bringing risks of unintended liquidity crunch. On the other hand, the ongoing economic weakness will likely force the government to delay major monetary tightening, resulting in new TSF exceeding RMB 17 trillion for the year.
The Chinese government has become more tolerant of slower growth but more focused on structural reforms
The government seems to have realized that the old credit-fueled investment model may have reached a certain limit, given the already high leverage level, especially at some local government level and the existence of excess capacity in some areas. While property activities are recovering, the central government is cautious in further stimulating such strength and would like to prevent a property bubble. Perhaps also importantly, although GDP growth has slowed to 7%+ in recent quarters, evidence suggests that unemployment pressure has so far remained subdued. In recent weeks, the government has sent signals indicating that while it intended to stabilize growth, it would focus its effort on structural reforms including reducing and abolishing administrative controls to help unlock new and autonomous sources of growth for the future.
Risk to our 2013 forecast is balanced
Downside risks could come from (i) a weaker than expected export growth due to weaker global recovery or a more serious impact from the recent RMB appreciation; (ii) unintended liquidity tightening arising from tighter regulations on shadow banking; and (iii) a sharp slowdown in property activities. On the upside, the continued strong property sales coupled with a stable property policy and the urbanization push later in the year could push property construction stronger than currently expected. Liquidity conditions may remain loose for longer, helped by accommodative monetary policy and increased foreign borrowing.
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