September 09,2011

Fresh Data Suggest China on Track for a Soft Landing

By Lu Ting

China's activity data were just released. Both production (IP growth) and demand (investment and retail sales) data suggest China is on track for a soft landing. The market could gain more confidence in the resilience of the Chinese economy, and needs to put less hope on an imminent monetary policy easing (other than some possible measures to offset the RRR base broadening). Amid this jittery global markets and worries on a double-dip in the US/Europe, China's activity data could deliver some support to prices of global raw materials.

IP growth quite resilient, pointing to a 9.3% GDP growth in 3Q11

Industrial production (IP) growth came in at 13.5% yoy in Aug, down from 14.0% in July and slightly below Bloomberg consensus at 13.7% (but exactly as we expected). Though the slower-than-expected reading is seemingly bearish, it actually shows that China's growth is quite resilient. With 14.0% and 13.5% IP growth in July and Aug, IP growth in 3Q should be around 13.5% YoY, pointing to a GDP growth around 9.3% in 3Q (note IP and GDP growth were 13.9% and 9.5% in 2Q11 respectively). We thus confidently maintain our 2011 GDP growth forecast at 9.3% and 4Q11 forecast at 9.0%. If no major disruption breaks out in Europe, some of those forecasters who revised down their 2011 annual GDP growth forecast to 9.0% or below in the past couple of weeks may have to revise up their forecasts (see our view at "Maintain growth forecasts on China, 23 Aug 2011"

Real activity data: Power, steel and cement

Power production growth slowed to 10.0% YoY in Aug from 13.2% in July and the average growth of 13.3% in 2Q11. Growth of steel products slowed to 12.9% YoY in Aug from 14.9% in July but still above the average 11.2% in 2Q11. Cement output growth declined to 12.8% YoY in Aug from 19.9% YoY in July, the average 20.5% in 2Q11 and 18.1% in 1Q11. The slowdown in cement output growth is due partially to a moderate slowdown in FAI growth and partially to a rising comparison base. The 20% growth of cement output is abnormal anyway, so normalization should be well expected. But we expect the slowing trend of cement output to be much flatter in coming months.

A moderate slowdown of FAI growth

FAI growth came in at 25.0% in YoY in Jan-Aug, down slightly from 25.4% in January-July and 25.6% in Jan-June. For Aug alone, FAI growth moderated to 22.9% YoY from 24.5% YoY in Aug, according to our in-house calculations. If adjusting for inflation of raw materials prices (up around 7-8% yoy), real FAI growth should be quite stable, at around 16-18% in the past several months.

By breakdown, property FAI, which accounts for 26% of total FAI, grew 33.2% YoY in January-Aug, down slightly from to 33.6% in January-July. In Aug alone, property FAI growth slowed to 31.6% YoY from 36.5% in July. Manufacturing FAI growth rose to 34.5% YoY in Aug from 29.1% in July by deriving from year-to-date data. Note that we should always be cautious when deriving monthly data from year-to-date FAI data, so those up and downs of individual sectors' FAI growth should be taken with a grain of salt.

Retail sales growth slowed to 17.0%

Headline nominal retail sales slowed to 17.0% YoY in Aug from 17.2% in July. Auto sales growth edged up to 12.4% YoY in Aug (vs. 11.9% in July) for above-certain-size retailers; while non-auto sales growth moderated a bit, perhaps on a lower YoY CPI inflation. Retails sales growth of food and beverage softened to 24.0% in Aug from 26.6% in July, that of home appliances declined to 14.8% from 18.9%, and that of construction materials declined to 25.4% from 32.4% for above-certain-size retailers.

(The author is a China economist with Bank of America/Merill Lynch)


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