China: GDP Growth Declines but Signs of Improvement

China’s GDP growth in Q4 beat expectations and declined only slightly from 9.1%
y/y to 8.9% y/y. Industrial production and retail sales were also better than expected in December, suggesting that the economy might have improved slightly in late 2011.

At the current juncture it appears that China is able to manage a soft landing.
However, weak fixed investment data underscore that a weak property market
remains a major downside risk for China.  

With no signs of a sharp deterioration of the Chinese economy and with inflation
remaining relatively high, today’s data suggest that People’s Bank of China will ease monetary policy cautiously. Nevertheless, we still believe a 50bp cut in the reserve requirement is imminent.

Details

China’s GDP growth in Q4 declined slightly from 9.1% y/y to 8.9% y/y (consensus: 8.7% y/y, Danske Bank 8.2% y/y). According to the China’s National Bureau of Statistics (NBS) GDP growth on a quarterly basis fell from 9.5% q/q AR in Q3 to 8.2% q/q AR. For Q1 and Q2 NBS reported GDP growth of 8.7% q/q AR and 9.4% q/q AR respectively. NBS has so far only reported quarterly growth rates for 2011. 

It should be noted however, that our own seasonally adjusted data paint a somewhat different picture, suggesting that GDP growth has slowed substantially in the previous quarters from around 10% q/q in Q1 to below 7% q/q AR in both Q2 and Q3. This pattern appears to be more consistent with the development in manufacturing PMIs and industrial production. However, our seasonally adjusted GDP data for Q4 suggest that GDP growth accelerated to 9.6% q/q AR, which appears out of line with both industrial production and
the manufacturing PMIs that both suggest that GDP growth did not improve markedly in Q4.

Industrial production also beat expectations as it accelerated to 12.8% y/y in December (consensus: 12.3% y/y, Danske Bank: 12.2% y/y) from 12.4% y/y in November. Seasonally adjusted industrial production in December increased 1.1% m/m after increasing 0.7% m/m in November. As shown in the chart to the right, the overall picture is that industrial production is stabilizing but has been growing below trend in Q4 (which we estimate to be 12%-13% for industrial production).

Retail sales also beat expectations in December, accelerating to 18.1% y/y (consensus: 17.2% y/y) after increasing 17.3% y/y in the previous month. This suggests that private consumption remains relatively resilient. However, fixed asset investment was weaker than expected in December, increasing  23.8% YTD (consensus: 24.1% YTD). This underscores that fixed investments and particularly real estate investments are currently the weakest spot in the Chinese economy.

Outlook

Today’s data suggest that growth in China has declined modestly. At this stage there are no signs that the Chinese economy is deteriorating markedly and China appears to be in for a soft landing. It is particularly encouraging that there are signs of stabilization and even improvement in the December data. This supports our view that GDP growth should start to improve in 2012 even though the y/y GDP growth rate is expected to continue to decline in Q1 2012. That said, there are continued signs of weakness in the property market and real estate investments and a weak property market remains a major downside
risk for China.

Today’s data also suggest that People’s Bank of China will ease monetary policy cautiously. We still expect a 50bp cut in the reserve requirement to be imminent, possibly later this week before the Chinese New Year holiday starts on 23 January. That said, today’s data could be an argument for PBoC to wait and see instead, partly because the weekly agricultural commodity prices indicate that food inflation is again increasing.

With China at this stage appearing to avoid a hard landing, today’s data also suggest that China will continue to appreciate CNY against USD although we expect the pace of the appreciation to slow markedly compared to 2011.