China: Slower Growth Expected
The economy slows …
We continue to anticipate the economy will expand 9.6 per cent YoY in the third quarter, easing from 2Q’s 10.3 per cent YoY rate. This will be the slowest rate of growth since 3Q2009.
… but positives continue to emerge
But simmering behind the headline growth trajectory there are some positives emerging. We noted the August improvement in the official manufacturing sector PMI here last month, and the significance of the sharp rebound in new orders in the month that drove the headline reading. More recently, growth in industrial production and retail sales has ticked higher after several months of moderating growth. We rate it as unlikely we will now see a sharp rebound in the economy in the months ahead but do expect a positive cycle to kick-in and support the economy by year-end despite global demand conditions for China’s exports remaining lacklustre.
Inflation ticks higher on food price pressure
The CPI increased by 3.5 per cent YoY in August, a modest acceleration from July’s 3.3 per cent YoY rate and the fastest rate of inflation since October 2008. China’s CPI has been disproportionately impacted by food price trends over recent years with food accounting for about a third of the overall index but experiencing large swings in prices.
August’s CPI increase was driven by higher food prices rising 7.5 per cent YoY. This is the fastest increase in food prices since late 2008 and is a consequence of poor growing conditions in several important growing areas impacting supply alongside rising demand.
Away from the food sphere, inflationary pressures remain modest with the non-food CPI increasing 1.5 per cent YoY in August, a moderation from 1.6 per cent YoY though each of the prior three months. The central bank, the People’s Bank of China, is more likely to focus on non-food price trends when it thinks about potential policy measures and recent
readings reduce the likelihood of a near term rate hike. Amidst (expected) ongoing reasonable domestic growth, and as downside risks to global growth dissipate, we rate it likely the PBoC will tighten policy via a 27bps hike in the key one year lending rate in 1Q2011.
Inflation steady although food prices will likely increase in the next few months
The yuan has appreciated sharply over recent weeks along- side escalating international calls for a stronger yuan. As the US mid-term elections near, the currency issue has focussed the minds of many senior US politicians on global issues amidst the ongoing tepid US domestic economic recovery. Also, the G20 leaders summit in November provides a forum for further complaints from some of China’s competitors in the international marketplace. The extent of yuan appreciation vs the dollar is modest, however, at 1.6 per cent since the end of August and we read this as a sign that a large revaluation will not be sanctioned in the months ahead regardless of further international calls for such an appreciation. We see China’s authorities as more likely to emphasise competitiveness rather than imported cost and international political pressures.
