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Published by Brian Ford

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Published by: Brian Ford on Mar 05, 2013
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a weekly chronicle of the Chinese economy 
Phat dragon
# 152
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based arereasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
Last week
Phat Dragon
allocated some precious columninches to the impending announcement of the official 2013policy targets. They have now been revealed - and they carrynon-trivial symbolic import. The GDP target was retained at 7½%(the 2012 actual was ~7¾%), but the M2 target was lowered to13% from 14% in 2012 and the CPI target was lowered from 4%to 3½%. Both M2 and CPI were one notch lower than expected.The lowering of the M2 target formally signals an end to anyperception of an accommodative tilt to monetary policy.
Phat Dragon
describes the resulting posture as ‘grudgingly neutral’.Effecting such a posture clears the way to credibly lower theinflation target, and (arguably) leave GDP number unchanged.
The government has chosen to describe fiscal policy as“proactive” and monetary policy as “prudent” since late 2010,despite having been in both aggregate tightening and easingphases over that period. The fiscal deficit target for 2013 wasset at 2% of GDP, which implies a modest expansion from theposition at the end of 2012. The mix between capital outlaysand consumption will likely be skewed in favour of the latter -with education, health and the safety net prominent elementsof Wen’s remarks.
Phat Dragon’s
antennae have also beenattuned to comments by Finance Ministry officials hinting ata set of decentralising fiscal reforms, some of which relate toland and housing; some public musing on the financing of Li’surbanization blueprint; and the clear recognition of the seniorleadership that at the bottom of everything lies a need toreduce factor cost distortions and improve capital allocation.
And on to housing. It is less than a week since
Phat Dragon
 wrote the following in response to the initial hand grenadeslobbed in the general direction of the housing market. Followinga short preamble on rising house prices, this was said:
“The policy response has been predictable:
reiterate the controlsthat are already in place
 , while placing an emphasis on local administrators taking care of their own patch. The atmosphericsare important here. Going in to the NPC, it is important for theleadership to talk a good game regarding equality, ... [and] ...housing affordability. The happy medium is to frown sternly at thetrend of house price appreciation, and to lance obvious excesseswhere they arise. However, you do not want to lean too heavily on the aggregate market, lest you soon begin to regret your initial zeal.” 
With further reiteration of controls this week (whichwere tantamount to saying there are,
, some principles inplace regarding housing, as well as some black letter law, soplease observe both) we now have a second salvo. The marketsbasically shrugged at the first but released an undignified squealat the sight of the second.
So does
Phat Dragon
need to respond with a revised growthforecast? No. And yes. The abstract view that activity growthwill resemble a hump that reaches its zenith around Q3remains the most likely outcome. Indeed, the risks aroundthat forecast were previously skewed in the direction of thepeak being somewhat later.
Phat Dragon
now views thoserisks around timing as more balanced. And the idea that theeconomy slows into 2014 is obviously not challenged by thesedevelopments. So the basic profile is intact. The composition ofthe growth may shift though. The ‘real time’ calibration of theinfrastructure spend on on-going projects, which can be usedto offset real estate at any stage of the cycle, will be in play.
Phat Dragon
introduced this concept as an enhanced feature
6 March 2013
Westpac Institutional Banking Group Economic Research economics@westpac.com.au www.westpac.com.au
Housing sales & policy announcements
-50-250255075100125150175200-50-250255075100125150175200 Jan-01Jan-03Jan-05Jan-07Jan-09Jan-11Jan-13%yr%yrCentreEastWest
Sources: CEIC, Westpac Economics.ShanghaispecificmeasuresLVR andmortgage rateincreasesDevelopercapitalrequ’mentsloweredMajordemandstimulus packageDirectlendingcontrols TaxincreasesBeginningof stimulus unwind2
mortgageLVRraisedSocial housing Targetsestablished Tier1cities undermicroscope, localofficials putonnoticeLendingcontrols,Investorcontrols.OfficialsaskedtosubmitpricecontrolplansFHBratediscounts
   S  o  m  e  c   i   t   i  e  s   b  a  c   k  u  n   d  e  r  m   i  c  r  o  s  c  o  p  e ,  r  e   i   t  e  r  a   t   i  o  n  o   f  e  x   i  s   t   i  n  g   2   0   1   1  p  a  r  a  m  e   t  e  r  s
03060901201501800306090120150180 Jan-05Apr-06Jul-07Sep-08Dec-09Mar-11Jun-12index
SH CompositeSH PropertyChina VankeH-shares
Sources: Bloomberg,Westpac.
China: property related & other shares
of the leadership’s demand management toolkit late last year,speculating that the somewhat ahead of schedule revival in theproperty sector was probably behind the dip in utilities spendingand centrally approved projects in Nov/Dec. Noting that thereinvigorated pipeline of infrastructure projects (first utilities andthen transport) was a response to weaker housing activity in thefirst place, keeping it on a short leash makes some sense. Thethought that a decent first half of this year is now in doubt isnot credible though. Construction will be a stronger support forgrowth this year than last - there is no other plausible argument.What is looking more fluid is the mix between the two majorcomponents of construction. The mix will be of interest to steelmills projecting demand for their various product lines, butmacroeconomically speaking, the total is what matters.
Stats of the week: The 5 most common surnames inChina are, in order, Li, Wang, Zhang, Liu & Chen.
Monetary and fiscal policy in China
-20-15-10-5051015-4-3-2-10123Mar-97Mar-01Mar-05Mar-09Mar-13% of GDPGap ppt
Credit to GDP gap (rhs)Fiscal position (lhs)
Sources: CEIC,Westpac Economics.

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