- GDP growth at 7.7% remains firm in 2013, slightly above the official target of 7.5%
- Progress in reigning debt and the risks related to shadow banking will be slow…
- …while exports will smoothen the transition in 2014
GDP growth remains firm in the fourth quarter of 2013
China’s GDP growth was slightly lower at 7.7% in the fourth quarter compared to 7.8% the previous quarter, leading to a 7.7% growth rate for 2013 as a whole, edging down from 7.8% in 2012. There was a steady improvement in the economy during the year, partly supported by stimulus in investment, including railways and tax breaks, while a gradual strengthening of exports to advanced economies softened the transition to a growth strategy led by consumption. China is one of the countries that is benefitting from the global recovery. Exports in the last quarter were firm, with an average growth of 7.5% yoy compared to 3% yoy in the previous quarter. There are however, claims that exports could again be over reported to facilitate capital inflows. There was evidence of this last year, but authorities took strict measures to crackdown irregularities in reporting trade between Asian counties and these measures proved to be effective given the adjustments that took place at the time. Meanwhile December’s string of data was mixed. Retail sales, a proxy for consumption decelerated marginally in December to 13.6% yoy from 13.7% yoy the previous month and this despite the anti-corruption campaign which has been putting some downward pressure on demand, but which had a more meaningful impact in the first half of the year. Industrial output is perhaps the weaker link in the data reported today. It slowed down in December to 9.7% yoy down from 10% the previous month. Throughout the year average growth has been slightly below 10%, but well below the double digit figures reported since 2009. Finally December’s year-to-date fixed investment slowed to 19.6% yoy down from 19.9% yoy, with infrastructure investment showing the largest slowdown.
Leverage, economic activity and outlook
During the global financial crisis in 2008, China’s authorities supported credit growth and investment. This was key in driving China’s recovery. Since then authorities have been trying to reduce the role of the banking system as a key supplier of credit and the growth of non financial lending has surged. The increase in demand for non financial lending has concentrated in local governments, state-owned enterprises, property sectors and corporates. The prospects that leverage could be more constrained in the future given the risks to financial stability have raised concerns about the growth path in China. The policies that have been announced, however, do not suggest that this will be an aggressive move, rather it seems that a gradual approach is the preferred choice. Indeed the 12th five year plan has an ambitious target for non-bank lending. Meanwhile, at the end of last year, authorities gave local governments the go-ahead to issue bonds as a way of rolling over their debt after an exhaustive audit report on public debt. At the same time, the latest round of measures surrounding shadow banking issued some weeks ago, showed a more balanced approach, compared to last year when substantial controls were issued for non-bank lending activities. Authorities now intend to minimize the risks of shadow banking in China, while enhancing the benefits. In the process the pricing of risks of shadow banking, including trust funds, will be more transparent. Responsibilities surrounding shadow banking will be more explicit in the future and will no longer fall solely in the hands of the government. In any case December’s report of total social financing (TSF), which includes off-balance sheet activities such as trust funds, showed that growth decelerated from 22.9% in 2012 down to 9.7% in 2013, which is a positive trend. All in all, we think that the government is determined to rein public debt and the risks of shadow banking, but we think the progress will be slow as the government tries to rebalance the economy. Domestic demand growth should remain steady this year, while external demand should boost the economy. Our forecast is 8% for 2014, under the assumption that the economic impact of meaningful reforms will only be felt in 2015.