Chinese economy nearing light at end of tunnel

Updated: 2012-12-04 06:59

By Peter Pak (HK Edition)

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Chinese economy nearing light at end of tunnel

For China's economy, it has been a tough nine months this year as people not only saw decelerating growth but also some structural problems. However, the worst may just be over based on the latest set of October official statistics. Most demand-side indicators in China's economy showed a mild rebound last month.

The country's October retail sales grew 14.5 percent year-on-year (YoY) after rising 14.2 percent in September, faster than market consensus. The auto sales rebounded the most, up from 1.7 percent in September to 7 percent in October while most basic consumer goods also experienced some acceleration.

Retail sales have experienced a noticeable recovery in the past three months, partially supported by consecutive hikes in wages and subsidy incomes especially for rural workers and urban poor households. Looking ahead, we expect the basic living consumption to maintain a relatively steady growth while some durables may be weaker in the short term.

Meanwhile, supported by the loosening in lending and fiscal policies, investment in infrastructure and social service continued to rebound in the past three months, with non-farm fixed asset investment (NFFAI) increasing by 20.7 percent in October, slightly up from the 20.5 percent growth in the first nine months.

The central government is likely to accelerate the urbanisation process and social security system construction in the next several years and the social service investment will probably maintain relatively fast growth in the future. However, the fixed asset investment (FAI) in manufacturing followed a slowing trend amid the weak demand and overcapacity pressure.

Another good sign is that the country's inflation remains benign as the Consumer Price Index (CPI) actually rose 1.7 percent in October, slightly below market consensus. The CPI growth has been below market expectation over the past three months, reflecting sluggish demand in the real economy.

Due to the economic slowdown and negative tail-raising effect, the Producer Ex-factory Price Index (PEFPI) and Producer Purchasing Price Index (PPPI) still declined significantly by 2.8 percent and 3.3 percent, respectively, in October. The indices had dropped 3.6 percent and 4.1 percent, respectively, in September. Going forward, the CPI growth is expected to pick up slowly, while the PEFPI is likely to see a narrower YoY decline in the fourth quarter.

I believe the October figures indicate that the Chinese economy may continue to encounter a modest rebound in the fourth quarter, with exports and FAI performance better this quarter versus the third quarter, supported by consecutive moderate recovery in the US economy and a further boost domestically for infrastructure and social service investments.

I reckon the central bank will probably loosen its lending policy and maintain ample liquidity in the interbank market to support the moderate increase of social financing and to facilitate the investment rebound. Meanwhile, the Ministry of Finance is likely to take a relatively proactive fiscal policy while allocating more funds for expenditures on agriculture, irrigation system, education, culture, healthcare, social welfare and social housing.

The author is executive director at BOCI Securities. The views expressed here are entirely his own.

(HK Edition 12/04/2012 page2)