TAKE THEIR WORD FOR IT – CHINA HAS BOTTOMED

Takeaway: A bottom in the Chinese economy will likely not have nearly the same impact as it did in 2009.

SUMMARY BULLETS:

 

  • From our vantage point, the most bullish data point emanating from China in the week-to-date – inclusive of the sequential acceleration in Manufacturing PMI and the PBOC’s record $60 billion injection into Chinese money markets this week – was today’s news that China’s GDP accounting methods were to be standardized with “international standards”.
  • From a forward-looking GIP perspective: Chinese GROWTH has likely bottomed; Chinese GROWTH is not poised to accelerate meaningfully over the intermediate term; Chinese INFLATION is in a bottoming process and likely would have bottomed already had we not seen the degree of CNY strength we’ve seen in recent months; Chinese INFLATION is poised to accelerate modestly over the intermediate term; The slope of Chinese POLICY has bottomed; and The slope of Chinese POLICY is not poised to be substantially eased over the intermediate term.
  • If China continues to grow at a pace slightly faster than what we saw in 3Q for the foreseeable future, would that be enough to save the global economy from sliding into recession over the intermediate term? We don’t know. What we do know is that sell-side consensus and, by proxy, corporate management teams aren’t even in the area code of asking themselves this question.

 

From our vantage point, the most bullish data point emanating from China in the week-to-date – inclusive of the sequential acceleration in Manufacturing PMI and the PBOC’s record $60 billion injection into Chinese money markets this week – was today’s news that China’s GDP accounting methods were to be standardized with “international standards”.

 

From what we’ve noticed over the years covering dozens of countries from a bottom-up perspective, international standards for GDP accounting = shoot first; ask questions later. More specifically, we think this means China is likely to adopt a more US-style GDP presentation: report the most positive headline figure you can and subsequently revise it down 1-3 times in the coming months/years. This bodes well for a sequential uptick in China’s YoY GDP growth in 4Q12E.

 

In recent weeks leading up to the general elections, the US has certainly challenged China as the largest economic data manipulator across the Global Macro landscape (monthly Jobs Reports, Consumer Confidence, GDP, ADP Payrolls, etc.), but it looks as if China wants to take back the baton. If that is the case, do not fight them. Going back to the aforementioned point regarding the implication of this change on China’s future GDP figures, a positive inflection from 3Q would be in line with our models, as well as recent commentary from Chinese officials:

 

  • “China's growth may have bottomed out in the third quarter of 2012 and a slight rebound may be seen in the final three months of the year.” – Yu Bin, director of the Macroeconomic Research Department at the Development Research Center
  • China will achieve its full-year growth target of 7.5 percent and the rebound in the fourth quarter is likely to extend into next year.” – Jia Kang, a Ministry of Finance researcher
  • An official at the Ministry of Industry and Information Technology recently stated that stronger growth in Q4 industrial output (vs. Q3) will lay a solid foundation for China to achieve its GDP growth target of over +7.5% for this year.

 

Our latest GIP outlook for China is included in the chart below; note the potential for Chinese GROWTH to slow in 4Q12E – an event that might feel like an outright recession for companies like BMW, Caterpillar and POSCO, all of whom are explicitly banking on some form of post-leadership transition stimulus:

 

TAKE THEIR WORD FOR IT – CHINA HAS BOTTOMED - 1

 

We’ve been vocal in recent weeks about our outlook on China’s economy. To sum it up in very frank clauses:

 

  1. Chinese GROWTH has likely bottomed;
  2. Chinese GROWTH is not poised to accelerate meaningfully over the intermediate term;
  3. Chinese INFLATION is in a bottoming process and likely would have bottomed already had we not seen the degree of CNY strength we’ve seen in recent months;
  4. Chinese INFLATION is poised to accelerate modestly over the intermediate term;
  5. The slope of Chinese POLICY has bottomed; and
  6. The slope of Chinese POLICY is not poised to be substantially eased over the intermediate term.

 

To points #2, #4 and #6, don’t just take our word for it; take the DRC’s official view:

 

“Next year, the economy will grow at a similar rate recorded in 2012, which is projected to be slightly higher than the 7.5 percent government target… Meanwhile, the growth of consumer price index (CPI), the main gauge of inflation, will rise to 4 percent in 2013. The figure is much higher than the below-3 percent rate predicted for [this] year. Easing measures adopted across economies, including the U.S., the European Union and Japan, have pushed up prices for global commodities and attracted inflows of short-term capital, which will likely hike CPI rates next year… The government will continue to implement a proactive fiscal policy and prudent monetary policy next year.”

-Yu Bin, director of the Macroeconomic Research Department at the Development Research Center, 10/26/12

 

On the fiscal POLICY front, it’s worth nothing that  China’s Finance Ministry had allocated 97% of the year’s budgeted funds for infrastructure spending through SEP. This means that in the absence of additional off-budget initiatives (hard to see w/ the upcoming National Party Congress dominating official attention), the Manic Media won’t be able to pester you with anymore unsubstantiated reports of Chinese “stimulus” spending that is actually nothing more than pre-planned expenditures for the rest of the year. Progress.

 

Additionally, government spending overall is up +21.1% YoY in the YTD through SEP, meaning that China will likely have to demonstrably slow the pace of expenditure growth if it is to meet its +14.1% 2012 target. Lastly, local governments, who can’t run budget deficits, may actually be feeling pressure to tighten fiscal POLICY as slowing land sales (-16.5% YoY in the YTD through SEP) forces them to turn to other measures of revenue collection (taxes, administrative fees, etc.).

 

TAKE THEIR WORD FOR IT – CHINA HAS BOTTOMED - 8

 

If you accept each of the aforementioned bullet points at face value, then it should come as no surprise to see the Shanghai Composite Index remain in a Bearish Formation, Chinese interest rate markets pricing out any hopes of monetary easing over the NTM, China’s sovereign yield curve flattening, the FX market continuing to price in demonstrable weakness in the CNY and CNH over the NTM, Chinese rebar curve still exhibiting elements of backwardation.

 

TAKE THEIR WORD FOR IT – CHINA HAS BOTTOMED - 2

 

TAKE THEIR WORD FOR IT – CHINA HAS BOTTOMED - 3

 

TAKE THEIR WORD FOR IT – CHINA HAS BOTTOMED - 4

 

TAKE THEIR WORD FOR IT – CHINA HAS BOTTOMED - 5

 

TAKE THEIR WORD FOR IT – CHINA HAS BOTTOMED - 6

 

Riddle us this: if China continues to grow at a pace slightly faster than what we saw in 3Q for the foreseeable future, would that be enough to save the global economy from sliding into recession over the intermediate term? We don’t know. What we do know is that sell-side consensus and, by proxy, corporate management teams aren’t even in the area code of asking themselves this question.

 

TAKE THEIR WORD FOR IT – CHINA HAS BOTTOMED - 7

 

If you’d like to get caught up on our latest thoughts on China, we encourage you to check out the following notes; as always we are available via email and telephone to discourse further:

 

 

Darius Dale

Senior Analyst


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