Why China's GDP May Confound the Sceptics

by Alaistair Chan, Moody's Analytics, 17 October 2011

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Risk Management

tags:
asset bubbles China economic outlook hard landing inflation property soft landing

Economic activity in China remains buoyant, and recent data confirm our base forecast for a soft landing. The government’s campaign to put the lid on inflation is starting to pay off, with consumer price pressures now past their peak.

However, market sentiment has now turned pessimistic, reflecting perceptions that the government faces difficulties in deploying further stimulus measures should global growth falter. Market sentiment may be too pessimistic.

Moderating expansion

GDP growth came in at 9.5% year-on-year in the second quarter. Using the government’s new quarterly measure, the second quarter saw a slight acceleration in activity, with the economy expanding 2.2% in the second quarter, up from 2.1% in the first.

Click image to enlarge

China’s trade surplus fell to US$14.5 billion in September, from US$17.8 billion in August. A deceleration in exports growth was the chief reason, and is possibly due to the deterioration in global financial markets in August. Further deceleration in exports would make it less likely that the yuan will continue appreciating against the dollar.

There are reasons for cautious optimism for the near term outlook. Purchasing manager surveys show that manufacturers received more export orders in September, which should translate into greater shipments in coming months.

On the imports side, demand is still strong for hard commodities. Lower prices may lower import revenues but do not seem likely to hurt volumes. Demand in China for iron ore will be boosted by continued housing construction. Oil demand could receive a boost from recent retail fuel price cuts.

Exports and imports are likely to grow at a slower pace in 2012 due to the weaker global economy. Global export demand will be limited by weakness in Europe, especially if some disorderly financial event were to occur, and lower commodity prices will reduce the import bill.

The value of the yuan has been in the news given the focus in the U.S. government. Although yuan appreciation has accelerated recently, further gains are likely to be more muted. Any deterioration in the trade figures is likely to prompt stronger objections to yuan appreciation from exporters and the Ministry of Commerce.

Industrial production has grown in the 13% to 15% range for the past 12 months. Motor vehicle production is hampered by weak demand after the reinstatement of sales taxes on fuel-efficient cars, but this has been offset by continued growth in heavy industries such as cement and steel, partly in response to demand from the construction sector.

I'm not very good about

Submitted by Anne Kingsy on 27 December 2011 - 5:33pm

I'm not very good about politics and government finance, but my friend Aaron DelSignore has extensive knowledge and experience in this field. I will ask him to offer some feed-back on the matter discussed here. He can surely make some interesting points.

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