ANZ Greater China Economics Weekly Insight / 16 July 2013 / 3 of 23
GREATER CHINA CHARTBOOK
OVERVIEW: CHINA’S GDP SLOWED FURTHER IN Q2
China’s Q2 GDP growth slowed further to 7.5% y/y, down from Q1’s 7.7%, putting at risk the 7.5%growth target set this year. The slowing growth was mainly dragged by declining industrial production(8.9% y/y in June vs 9.2% in May) and worsening export conditions (-3.1% y/y in June vs +1.0% in May).We believe monetary policy inaction and even policy mistakes in handling the surging interbank rates,have also contributed to cooling economic growth.
Looking forward, some downside risks remain: First, the unemployment pressure will rise significantlybecause of lost trade competitiveness and a record number of new graduates entering the job market thisyear. Second, high money market rates and deleveraging by commercial banks will spill over to the realsector. The small and medium enterprises will feel most of the brunt, further increasing the volatility of thissector. Third, local government financing platforms could quickly become a lot more fragile.
To head off such risks, the government will need to take prompt policy actions. Monetary policy mustchange to reflect the rapidly changing domestic and external conditions. An interest rate cut is longoverdue, and a reserve requirement ratio cut should not be excluded if capital flight were to occur. China’sfiscal policy is still effective as the country still has plenty of room to invest: urban infrastructure,technology upgrading, and human capital. Finally, reforms and opening up of the financial sector will alsohelp instil confidence on China’s future growth prospects.
We believe these policy reactions should allow China to grow at around 7.6% this year with CPI inflationfalling to a range of 2.5 to 3.0%.
These policies will have major implications for domestic rates and the RMB exchange rate. Market ratesshould see a general downward trend and the RMB should continue to weaken in the second half, not onlyagainst the USD but also its Asian crosses.
Exports grew by a surprisingly large margin in June on the back of strong demand from ASEANand Mainland China. The electronics sector stayed resilient although household consumption remainedweak. GDP is forecasted to have grown modestly by 1.89% y/y in Q2. Our recent client visits also suggestthat the electronic sector remains upbeat. Taiwan’s external demand will likely recover in the second half.
As China has tightened over-invoicing and round tripping in trade, goods flow in Hong Konghas started to decline. Fortunately, domestic consumption holds up well as high property prices continue topreserve household wealth. HKD HIBOR barely rose despite the US tapering concern.
China - GDP Growth
024681012141618202005 2006 2007 2008 2009 2010 2011 2012 2013y/y q/q, saar
China - Contribution to GDP Growth
-50510152002 03 04 05 06 07 08 09 10 11 12 13H1Consumption Investment Net Exports GDP, y/y
Taiwan - Trade Developments
-20-1001020304050Jun11Aug11Oct11Dec11Feb12Apr12Jun12Aug12Oct12Dec12Feb13Apr13Jun13-2-1012345Trade Balance, $bn (RHS) Exports, y/y Imports, y/y
Hong Kong - 1-month HKD HIBOR
0.200.220.240.260.280.300.32Mar12May12Jul12Sep12Nov12Jan13Mar13May13Jul131m HKD HIBOR
Sources: Bloomberg, CEIC, ANZ