“The May economic indicators suggest that the Chinese economy is on the path of a weak recovery, but domestic demand remains on the soft side,” wrote analysts at J.P. Morgan. “The big challenge for the economy remains the continuous softening in manufacturing investment, which is related to overcapacity and declining rate of return on investment,” they wrote. Likewise, Société Générale economist Yao Wei was quoted by Dow Jones Newswires as saying: “There is no sign of full recovery in the Chinese economy, and a strong rebound this year is unlikely.” Yao projected second-quarter gross domestic product growth at 7.6%, which would mark a deceleration from the first quarter’s 7.7% expansion, and a further easing from 7.9% growth clocked in the final quarter of 2012. J.P. Morgan, which earlier this year had called for a 8.2% increase in GDP for all of 2013, currently puts full-year growth at 7.6%, while Barclays economist Jian Chang says she and her colleagues have cut their full-year forecast to 7.4% from 7.9% before the May data. Will Beijing act? To be fair, a few economists saw the weekend’s slate of data as positive, mainly because inflation showed easing, with the consumer price index rising 2.1% in May from April’s 2.4%. “It would be difficult to concoct a more benign set of figures,” said CommSec chief economist Craig James. “Simply, with inflation well contained, policy makers have maximum elbow room. More stimuli could be provided if needed in the future.” AMP Capital chief economist Shane Oliver agreed, saying the better inflation picture and slowing credit growth suggest “plenty of scope for monetary easing if required.” But some of their peers said that despite inflation offering an opening for further policy moves to boost growth, China’s newly installed government led by President Xi Jinping and Premier Li Keqiang has no intention of launching fresh stimulus at this point. “Despite the soft economic data, there is no indication that new leaders will introduce new stimulus measures soon,” wrote the J.P. Morgan analysts. “Instead, the focus is on structural economic reform that aims to mitigate structural imbalances in the economy. Therefore, the economy will continue to face the headwind in the coming quarters,” they wrote. Barclay’s Jian Chang said “the new leaders’ level of tolerance for slower growth” was a driving factor in Barclays’ cut to its 2013 China growth projection. “We now think Premier Li’s bottom line for growth is probably lowered to 7% from 7.5%,” she wrote in a research note. “His recent speeches highlighted the challenges for China to reach the 7% target in this decade and the need to accelerate structural reforms to unleash growth potential.” In fact, since some of the planned reforms, such as interest-rate liberalization, could become a drag on growth, she said that Barclays had also cut its 2014 growth forecast to 7.4% from a previous 8.1% estimate. Certainly, China has conducted some very aggressive stimulus measures since the 2008 financial crash, but many economists cite these moves — and the breakneck growth in credit in particular — as having caused problems, such as stoking bubbles in real estate and other assets and boosting the number of shaky loans in banks’ lending portfolios. “As China adjusts to a lower potential growth, the [People’s Bank of China] ... is faced with the usual conundrum of whether further aggressive easing helps or backfires,” wrote Société Générale senior currency strategist Sebastien Galy. But, Galy said, even doing nothing could amount to de-facto stimulus — including holding the yuan-dollar exchange rate at current levels. “Simply staying put with the [U.S. dollar’s rate against the Chinese yuan] is the equivalent of easing by importing” the quantitative easing of the U.S. Federal Reserve.
Posted on: Fri, 12 Jul 2013 09:28:41 +0000
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