November’s package of data showed that economic activity remains firm. Although fixed investment and industrial production softened a bit, retail sales and exports continued to show a strong growth momentum. This is consistent with economic growth that is stabilizing, with a stronger drive coming from consumption. Meanwhile, China is moving ahead with its reform agenda. In the past few days it has taken steps to further liberalise the economy, by providing additional guidance on the free trade zone and by pushing forward its agenda for interest rate liberalization. Our forecast for GDP growth of 8% in 2014 hinges on stronger global demand, while domestic demand will remain solid.
November’s data robust
The data released in November showed that exports continued to lead the way increasing to 12.7% yoy from 5.6% yoy in October, while retail sales picked up to a solid 13.7% yoy from 13.3% yoy. Industrial production softened a bit to 10% yoy down from 10.3% yoy in October, while fixed investment edged down to 19.9% down from 20.1% in the same period. Looking at the details of fixed investment, infrastructure investment accelerated (24.5% was 15.5%), particularly railway and real estate investments, while, manufacturing investment decelerated (18.6% was 19.1%). We expect that GDP growth will moderate a bit in the fourth quarter, but that that the underlying data will remain strong.
Trade balance widens, but some doubts on data
China is one of the countries that is benefitting from the global recovery. Export growth in November was strong at 12.7% yoy up from 5.6% yoy in October, while imports slowed to 5.3 from 7.6% as a result of slower growth of imports of raw materials (iron ore and copper). This led to a widening of the trade surplus to a five year high and has contributed to a further appreciation of the RMB. Across destinations, export growth was broad-based. Exports to the US, EU and ASEAN increased to 17.7% yoy, 18.4% and 16.7%, respectively up from 8.1% yoy, 12.7% yoy and 10.7%, respectively, in October. There are concerns that this strong data could be driven by over-reporting of trade data.
Last year exports were overstated to gain financial benefits through tax rebates or by embedding capital flows in trade transactions. This led to more controls from China’s authorities, which resulted in lower export growth in the months that followed. At that time, exports to Asia were mainly affected. November’s official PMI pointed to slightly stronger external demand, with the new export orders component of the official PMI edging up to 50.6 from 50.4 in October. We think that the recovery of the global economy explains a large part of the stronger export data, but we expect authorities to intensify controls given the impact of capital flows on the currency. In any case, as the global recovery gains momentum, this will be supportive for China’s economic activity as the rebalancing strategy takes form.
Consumer prices moderate
Consumer price inflation (CPI) moderated to 3.0% yoy in November from 3.2% in October. This mainly reflects lower food price inflation, which dropped to 5.9% in November from 6.5% the previous month. The slowdown was driven by a lower vegetable price inflation. Meanwhile, falls in producer prices eased, narrowing to -1.4% y/y from -1.5% in October. Continued softness in global commodity prices and faster RMB appreciation are likely to keep PPI inflation low. We expect somewhat higher inflation in 2014 (3.5% yoy) driven mainly by higher labour cost growth.
Reforms taking shape
November’s third plenum unleashed the reform agenda for the coming years. The tendency of the reforms is to give free markets a more decisive role. Since then the initiatives announced have been moving in this direction. Indeed, following the launch of the Shanghai free trade zone (FTZ) on 29 September, authorities have released guidelines (2 December) which cover a broad range of topics. These include the close management of foreign and domestic currency accounts by splitting investment and financial activities. This is a clear sign that the overall liberalisation process will happen in a controlled and gradual manner, and will be closely monitored by the People’s Bank of China. Other measures announced are intended to facilitate currency convertibility for investment activities and expand RMB-cross boarder usage.
Meanwhile, last weekend China moved ahead with its agenda for interest rate liberalization. China launched certificates of deposits to allow banks to trade deposits with each other at a market-determined price. This is expected to direct banks to a more deregulated environment, improving the circulation of cash in the interbank market. The People’s Bank of China expects this to “standardize the interbank deposit business and expand the financial channels in the interbank market and promote the development of the money market”. These announcements are only the beginning of a large range of measures that will follow as China slowly but surely puts in place its reform agenda. These are all steps in the direction of giving markets a more decisive role.
Economic outlook in 2014
The annual Central Economic Conference which started today will lay out the official targets for GDP growth in 2014 and supporting measures. It could be that that authorities set a more moderate target for growth of 7.0% for 2014, but this should be seen as a bottom limit. Despite the improving economic data, a strong rebound in the coming year is not likely. Consumption will support domestic demand, while the pace of growth in infrastructure investments will continue gradually declining. Export growth should also offset the slowdown in investment. Our GDP forecast is 8% in 2014. We think that reforms at this stage will continue to go hand in hand with growth.