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Takeaway: Chinese policymakers have increasing scope to stimulate, but we think they are also increasingly less likely to pursue anything meaningful.

SUMMARY BULLETS:

  • Importantly, our lackluster outlook for the Chinese property market over the intermediate term – an outlook largely driven by the collective resolve to avoid a bubble among Chinese officials – keeps a lid on our GROWTH expectations for the Chinese economy as a whole. Specifically, we don’t see China returning to anywhere near double-digit growth anytime soon.
  • Moreover, we continue to aggressively downplay market chatter of a sizeable stimulus package to be implemented over the intermediate term. The latest INFLATION data affords Chinese policymakers additional scope to stimulate, but we continue to see signs of limited desire to do so – especially is the GROWTH data continues to improve like it did in SEP.
  • Interestingly, the street is expecting a v-bottom in Chinese growth starting in 3Q12 and extending through the NTM; going forward, it’s all about navigating expectations that may be too high and potentially heading higher over the next few weeks/months – especially if China’s 3Q12 Real GDP growth beats consensus expectations on Wednesday night (our models suggest this is a likely scenario). We see that shaping up as a positive catalyst in the immediate term and a negative catalyst over the intermediate term as stimulus hopes fade.

The note below expands upon a topic we discussed late last week – specifically whether or not the global economy was headed for an outright contraction over the intermediate term. Please refer to the following notes for more details:

Over the weekend, China reported a handful of key SEP economic data; we use our proprietary GROWTH/INFLATION/POLICY lens to analyze the data for you in the prose and charts below.

GROWTH

  • Export growth came in at +9.9% YoY, accelerating from +2.7% YoY in AUG. Shipments to the US and EU accelerated to +5.5% YoY and -10.7% YoY from +3% YoY and -12.7% YoY in AUG, respectively.
  • Import growth accelerated to +2.4% YoY from -2.6% YoY prior; anecdotally, copper imports climbed to a 4MO high and the volume of iron ore imports was the largest since JAN ’11.
  • The Trade Balance widened to $27.6B from $26.6B, pushing up FX Reserves to $3.29 trillion from $3.24 trillion.
  • M2 Money Supply growth accelerated to +14.8% YoY from +13.5% YoY in AUG – good for the fastest pace of growth since JUN ’11.

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 1

INFLATION

  • Headline CPI slowed -10bps to +1.9% YoY. Food CPI slowed to +2.5% YoY from +3.4% YoY in AUG. Non-Food CPI accelerated to +1.7% YoY from +1.4% YoY in AUG.
  • Headline PPI slowed to -3.6% YoY from -3.5% YoY in AUG. Manufacturing PPI slowed to -4.2% YoY from -3.9% YoY in AUG.

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 2

POLICY

On the heels of the SEP GROWTH and INFLATION data, several key Chinese policymakers were out with some interesting quotes, which, on balance, were largely intended to temper market expectations for meaningful stimulus:

  • PBOC Vice Governor Yi Gang: “That the most important job for the central bank is to control inflation… While this year's inflation rate is fine and may be +2.7% for the full year, longer-term threats are from agricultural costs and prices for imported raw materials, commodities and energy, which can be driven by global monetary easing… China's fiscal and monetary stimulus will be appropriate to counter the country's economic slowdown and avoid any negative fallout. The stimulus package, I think, this time will be appropriate in terms of size. When I say appropriate in terms of size, that is large enough to stabilize growth, but not too large to cause some further negative impact, or negative problems in the future."
  • PBOC Governor Zhou Xiaochuan: “Quantitative easing policies worldwide could cause inflationary risks… Central banks should consider draining excessive liquidity injected into the market and eliminate inflationary pressure in the long-term."
  • PBOC Secretary of Discipline Wang Huaqing: “The central bank is putting more emphasis on price-based tools to manage monetary policy and strengthening macro prudential rules to shield the country's financial sector from systemic risk. [The PBOC] was putting greater stress on price-based tools and stepping back from direct control on liquidity.” (i.e. reverse repos)

Taken in conjunction with the trend of rhetorical leanings from other bodies of Chinese government (State Council, NDRC and MOHURD), we are inclined to interpret this latest batch of commentary from the Chinese central bank as: “inflation is under control now, but key short-term and long-term risks remain; don’t expect too much from us on the stimulus front”.

Recently we’ve been flagging the developing trend of CNY strength (at a ~19YR high) and its divergence from the PBOC’s policy exchange rate (at least until late last week) as a sign that international investors were speculating on the PBOC having to defend the country from the inflationary impact of QE3-inspored commodity speculation, as well as poignant China-bashing on the US presidential campaign trail. Chinese interest rate markets, which have traded quite hawkishly in recent months and are no longer pricing in substantial monetary easing over the NTM, are in confirmation of this view.

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 3

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 4

Interestingly, the NDF market continues to anticipate a fair degree of CNY and CNH weakness over the NTM, suggesting intermediate-term GROWTH concerns have not fully dissipated.

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 5

KEY CONCLUSIONS

The aforementioned divergence between China’s rates and FX markets makes total sense to us, given the POLICY headwinds still facing China’s property market (Fixed Capital Formation = 46.2% of GDP). To the extent the September PRICE and DEMAND data comes in hot, we could be looking at another round of incremental tightening in this sector over the coming months. For our latest deep dive on China’ property market, refer to our 10/4 note titled, “HOPE VS. REALITY IN THE CHINESE PROPERTY MARKET”.

Importantly, our lackluster outlook for the Chinese property market over the intermediate term – an outlook largely driven by the collective resolve to avoid a bubble among Chinese officials – keeps a lid on our GROWTH expectations for the Chinese economy as a whole. Specifically, we don’t see China returning to anywhere near double-digit growth anytime soon. Moreover, we continue to aggressively downplay market chatter of a sizeable stimulus package to be implemented over the intermediate term. The latest INFLATION data affords Chinese policymakers additional scope to stimulate, but we continue to see signs of limited desire to do so – especially is the GROWTH data continues to improve like it did in SEP.

It appears Chinese policymakers – the very architects of their current economic slowdown – are content with a growth rate trending in the range of ~7.5%, which is exactly what their current 5YR plan calls for. The days of China consistently beating GDP targets by 200-400bps are likely long gone as Chinese policymakers appear committed to truly transforming their economic growth model.

Interestingly, the street is expecting a v-bottom in Chinese growth starting in 3Q12 and extending through the NTM; going forward, it’s all about navigating expectations that may be too high and potentially heading higher over the next few weeks/months – especially if China’s 3Q12 Real GDP growth beats consensus expectations on Wednesday night (our models suggest this is a likely scenario). We see that shaping up as a positive catalyst in the immediate term and a negative catalyst over the intermediate term as stimulus hopes fade.

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 6

Darius Dale

Senior Analyst