ANZ Greater China Economics Weekly Insight / 14 May 2013 / 3 of 23
GREATER CHINA CHARTBOOK
OVERVIEW: STRONG CREDIT EXTENSION FAILED TO TRANSLATE INTO ACTIVITY GROWTH
While China’s activity data improved somewhat in April, growth momentum remains sluggish. Theimprovement in the headline industrial growth figures is largely due to a low base effect of last year.
Trade growth remained strong in April, following a surge in the past two quarters. However, we doubt thestrong external performance. The trade data defies the weak trade data reported in other regionaleconomies. Our previous study (ANZ Greater China Insight, 7 May 2013) indicates thatexporters/importers may use cross-border trade for financial gains.
CPI inflation rebounded modestly to 2.4% y/y in April, from March’s 2.1%, slightly higher than marketexpectations (2.3%). However, PPI declined by 2.6% y/y in April, compared with -1.9% in March,reflecting the recent pullback in raw material prices.
Credit and money supply grew strongly in April, suggesting that domestic monetary conditions have beensubject to strong pressure from capital inflows.
We believe that the mild inflation outlook, together with sluggish domestic demand, has set the rightconditions for a rate cut. The RMB is under significant appreciation pressure owing to the widening interestrate differentials between RMB and other key currencies in the world, especially after the recent ECB, RBAand BoK's rate cuts. Lowering the interest rate differentials will help dampen the capital inflows, whilefalling inflation will offset the risk of negative carry in deposit rates. Meanwhile, the PBoC could allow banksto raise their deposit rates to up to 1.2 times the policy rate. This policy will not only push forward interestrate liberalisation but also reduce the possibility of a negative real interest rate.
Q1 GDP contracted 0.81% saqr, as global economic recovery failed to gain traction. Weakexternal demand dragged on the economy, reflecting the slowdown in Mainland China and the EU. Webelieve momentum will pick up mildly in Q2 and accelerate through the rest of the year, in conjunctionwith the pick up in China and the US. Domestically, investment should continue to be the main driver, asinvestment from electronic producers remains upbeat.
Hong Kong’s headline GDP grew 2.8% y/y in Q1. Sequentially, the economy barely expandedwith a 0.2% q/q sa gain. This is in line with the downside surprise we saw for China and Taiwan. Privateconsumption held up and was the biggest contributor to helping the city’s state maintain positive growth.
China - Domestic Demand Indicators
Industrial Production, y/y Real Retail Sales, y/y
China - Inflation
Taiwan - Contributions to GDP Growth
Private Consumption Government ConsumptionInvestment Change in StocksNet Exports y/y
Hong Kong - Contributions to GDP Growth
(ppt)-10-5051015Sep10Dec10Mar11Jun11Sep11Dec11Mar12Jun12Sep12Dec12Mar13Private Consumption Government ConsumptionInvestment Changes in InventoriesNet Exports Total, y/y
Sources: Bloomberg, CEIC, ANZ