Much of the slowdown in growth in the third quarter came in the first half, where the external headwinds and the delay in policy stimulus taking effect weighed on growth across a range of sectors. As the effect of the monetary policy easing has begun to feed through, with a 56 basis point (bp) cut in the headline lending rate and 100bp cut in bank’s required reserve ratio (RRR) since February, as well as tentative signs of stabilisation in the external environment, we have witnessed an improvement in activity in the latter part of the quarter. Indeed, September’s monthly data was better across the board, with exports, monetary aggregates, industrial production, fixed asset investment and retail sales all rebounding and beating consensus estimates. Additionally, PMI survey data has stabilised, with leading components such as the new orders/inventory ratio rebounding strongly. We believe this heralds the much awaited turnaround in Chinese activity.
One reason for our confidence that we will see a soft landing is due to data coming out of the housing sector, where prices appear to have stabilised and sales have been picking up, which generally leads housing construction (chart 1). Although we expect this stabilisation to continue, one disappointing aspect of today’s releases was that of the property sector, which suggested a cooling between August and September.
Chart 1: Property sector shows signs of life, but justifies further support
Source: Thomson Datastream, Schroders. 18th October 2012.
This disappointment from the housing sector reinforces our view that further cuts to both the lending rate and RRR would be both justified and welcome, and we have previously called for a 25bp reduction in the former and 100bp reduction in the latter by year-end. Though scope remains for further policy easing, with inflation falling below 2% in September and the inflationary outlook continues to look benign, the chance of it occurring in the near-term may be decreasing; with the People’s Bank of China (PBoC) currently content to wait and see the effects of earlier stimulus and use short-term repo operations to pump liquidity into the system instead. We believe that the housing sector could still use additional support, and with the distinct possibility that the recent improvement in external sentiment and macroeconomic data will be a fleeting phenomenon we would like to see further stimulus enacted. Our below-consensus call for eurozone growth suggests that a fourth-quarter pick-up in China would be unsustainable without further easing.
One area of concern has been the uncertainty caused by the upcoming political transition in China, which until recently had not been formally announced. It is highly likely that this has weighed on sentiment, delaying investment and spending decisions and adding to existing headwinds to activity in the third quarter. The recent announcement that the transition will take place on the 8th November (two days after the US elects its President), however, should help alleviate some of the uncertainty and provide a boost in the final quarter. The inertia caused by the transition may not be confined just to corporates and households either, as it is possible that the PBoC is waiting until after November 8th to enact further easing measures.
Overall, today’s data should be supportive for risk assets, particularly those highly geared towards Chinese growth (such as the German Dax, emerging market equities and commodity currencies like the Australian Dollar), with definite signs that Q3 marked the nadir of the Chinese growth cycle and signs of strength towards year-end and going into 2013. Over a twelve month horizon, however, downside risks to growth remain; primarily through further deterioration in external sentiment and macro data (either in the eurozone or through the US fiscal cliff) or another downturn in the domestic housing market without the necessary policy support.
