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TCB CC QN LEI Monthly Summary March 2012 Final

TCB CC QN LEI Monthly Summary March 2012 Final

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Recent volatility in the LEI components underlines growing economic uncertainty
Interpretive Comments on
The Conference Board Leading Economic Index 
®
(LEI) and
The Conference Board Coincident Economic Index 
®
(CEI) for China
 April 1, 2012 (February 2012 data)
The Leading Economic Index for China increased 0.8 percent in February, down from January’s 1.5 percent
increase. The upward movement was led by consumer sentiment and credit growth; however, growth in bothcomponents was markedly weaker compared to previous months. The six-month growth rate stood at 5.0 percent,down from 5.7 percent in the previous six months. The more widespread weakness among the indicators, and themoderation in the six-month growth rate of the LEI, suggest that a pick up in the rate of economic growth is unlikelyin the coming months.The most important insight for this month is that the underlying leading indicators have become somewhat morevolatile which suggests that structural changes may be at work. This leads one to speculate that China
’s growth rate
is slowing, not just from a cyclical perspective but also more structurally as demographic changes begin to take holdand changes in policy direction may set in as well.Official statements and commentary within the policy community seem to be indicating several important dynamicsas regards the Chinese economy: real estate and monetary policy will remain tight to contain over-investment;slower growth will be tolerated; and the reform debate is heating up as regards how to change Chi
na’s
pattern of growth. 2012 portends to be a challenging year for opining the direction of Chinese economy, as various market andregulatory forces counteract each other, a situation that will likely intensify in the run up to the political transitionthat begins later in the year.Still, as of yet, our 2012 growth forecast is unchanged at 8 percent, down from 9.2 percent in 2011. The globalenvironment has recently offered some tentative signs of stabilization with the Eurozone crisis gaining a short respiteand U.S. growth surprising to the upside. Export markets in China will remain sluggish, but for now a suddendeterioration in the already-fragile real estate sector is the top risk to our China forecast.
 
 
Comments on
The Conference Board Leading Economic Index
® (LEI) for China February 2012 (January 2010 data)
What the Numbers Tell Us
 – 
 
 
The LEI
increased 0.8 percent in January, while its six-month growth rate fell to 5.0 percent for the August-to-February period
 – 
down from 5.7 percent in the previous six months. The slowdown in the six-month growth rate inparticular confirms the moderating growth trend now underway.
 
Four of the six components provided positive contributions to the index, but each only slightly. The two largestcontributors were credit growth and consumer sentiment, as measured by
Total Loans by Financial Institutions
andthe
Consumer Expectations Index
, respectively. However, both of these components continue to show weak overallgrowth, as consumer expectations matched their August level and new loan growth has been decidedly weaker thanlast year.
 
Meanwhile, growth in the
 PBoC’s
5000 Industrial Enterprise Survey: Raw Materials Supply
and
PMI: New Export Orders
were flat, adding only marginally to the advance in the index. This suggests continued weakness in themanufacturing sector, both from domestic and foreign demand perspectives.
 
Preliminary data for
Floor Space Started 
(estimated) placed a small drag on the index after an uptick in January, and
PMI: Supplier Delivery
also detracted from growth in the headline index.
 
The CEI showed a strong increase, up 4.1 percent from the month before after January’s revised 2.0 percent decline.
The strong monthly uptick was most likely due to the resumption of industrial activity after the Chinese New Yearholiday in January. Preliminary data for
Value Added of Industrial Production
showed a particularly strong reboundafter the January slowdown. All the indicators added positively to the CEI index in February, which offered a stark reminder that even while most China watchers are focusing on the slowdown in the top line growth rate, the datasuggests that current economic activity is pretty robust.
Our Interpretation of the Numbers
 – 
 
 
While the distortions from Chinese New Year continue to make data interpretations difficult, particularly due to theneed for preliminary data estimations, the overall trend seems to be toward broad-based moderation in growth, whichmay weaken further in coming months. While the headline China LEI increased 0.8 percent from January, the slowerrise in individual indicators in February may be early signals of weakening. Over recent months, headline LEIgrowth has generally been
checked by at least one indicator’s strong negative movement
, offsetting other positivecontributions. In February, however, four components showed only a slight positive gain, while two detracted fromthe index somewhat
 – 
suggesting that weakness has continued to diffuse across the indicators. Additionally, the six-month growth rate of 5.0 percent remains subdued compared to the beginning of last year. Recent statements fromthe government seem to acknowledge the overall slowing trend, and increased volatility within the underlying LEIcomponents gives some reason to suspect a more structural easing of growth.
 Overall the Data look weak
 
Loan growth remained subdued in February. Although overall credit, as measured by
Total Loans by Financial Institutions
made the largest positive contribution to the index in February (along with consumer expectations), newloans in February registered a relatively weak 711 billion RMB
, down from January’s 738 billion RMB
. Monetarypolicy has remained relatively tight in the first part of 2012 even in the face of unusual financial pressures, such aslow deposit growth, slower capital inflows and high loan-to-deposit ratios which are acting to further constrainlending. Savings deposits did expand by 1.6 trillion RMB in February, but over half of this growth came as a resultof increased corporate deposits (companies tend to reduce their cash on hand after the Chinese New Year holiday).
 
Demand was also weak across the board.
PMI: New Export Orders
was just barely above the positive threshold afterseasonal adjustment. This is particularly striking as PMI data by nature reflect the perceived change from theprevious month, and since the holiday season fell in January, one would expect somewhat of a bounce back the nextmonth. In addition, the headline trade data was particularly weak in February, as the trade balance registered a deficitof $31.5 billion USD. Due to the seasonality issue, January-February data together give a more reasonable picture of 
 
 
Comments on
The Conference Board Leading Economic Index
® (LEI) for China February 2012 (January 2010 data)
trade dynamics. For the two month period, the deficit stood at 4.2 billion USD. This outcome is quite weak, andunderlines the continued weakness in the U.S. and Europe even as signs of stabilization have begun to surface inboth economies.
 
Domestic conditions were weak throughout the manufacturing sector.
PMI Supplier Deliveries
detracted slightlyfrom the index while preliminary data for the
 PBoC’s 5000 Industrial Enterprise Survey: Raw Materials Supply
 
provided a very minimal positive contribution. Additionally, according to the NBS official release, gross industrialoutput registered only an 11.4 percent y-o-y gain in the January-February period, down significantly from theaverage of 12.8 percent in the fourth quarter of 2011. Fixed asset investment also fell to 21.5 percent y-o-y for thetwo month period, down from 23.8 for all of 2011. Finally, the flash HSBC PMI reading came in at 48.1 recently, itsfifth month in contractionary territory, and the lowest reading since November. These data all point to a broadslowdown in the domestic industrial and manufacturing sectors.
 
Along with the weakening data from the real economy, inflation eased to 3.2 percent y-o-y in February, sharply
down from January’s 4.5 percent. While some analysts
see this as an indication that the PBoC now has greater roomto use monetary policy to support the economy, the central bank seems to be committed to staying relatively tight fora host of reasons. First, the average inflation figure for January-February is 3.9 percent, not substantially below the4.2 percent average for November-December. Thus, to anchor inflation expectations, the PBoC will likely want tosee inflation stabilize more firmly below 4 percent before it is truly comfortable loosening in any significant way.Moreover, tight monetary policy seems to be in place for more reasons than containing inflation. Indeed, preventingcontinued poor investment and over-investment seems to be the primary target.
 
In addition, overall monetary policy is becoming more complicated. As funds continue to be placed outside of thebanking system
 – 
in wealth management products, company balance sheets and off-the-books loans
 – 
the actualtransmission of monetary policy has arguably weakened somewhat (as we detailed in our previous LEI commentary). Capital flows remain volatile, and it seems that money may once again be flowing out of the country (in March).Recent weak data has revived depreciation pressure on the yuan, and the position of FX purchase slowed sharply inFebruary even after accounting for the trade deficit. Both of these factors indicate that demand for RMB has droppedsignificantly in recent days.
 
What’s more, the incubation of the
offshore RMB market may be exacerbating these flows, as we asserted in a recentchart of the week .These developments have made tracking the size of cross border flows more difficult. As such, thePBoC may be waiting to see how capital flows evolve over the next weeks and months before committing to anyfurther easing. If it becomes more probable that strong outflows will continue, the central bank will likely cut reserverequirements as a liquidity response, while raising the daily fixing of the onshore yuan as a scheme to attract capitalback into the
mainland. In short, the PBoC’s
three key mandates: (1) to fight inflation, (2) regulate capital flows, and(3) maintain a tightly managed exchange rate, have begun to conflict more than usual in recent months.
The central government acknowledges slower growth
 
Early in March the government held the Na
tional People’s Congress (NPC), widely understood to be a “rubber stamp” session that lays out the agenda of the leaders on the standing committee. The opening speech by Premier 
Wen Jiabao garnered much media attention for the announcement of a 7.5 percent growth target for 2012. While thegovernment regularly beats its stated growth targets, announcing a number below 8 percent seems like a clear effortto manage expectations as the slowdown proceeds. In his closing press conference the Prime Minister addressed abroader range of issues including real estate, local government debt and the reform agenda.
 
In regard to real estate the Premier
emphasized that prices still have further to fall in order to reach a “reasonablelevel.” The ce
ntral government appears highly committed to sustaining administrative property transaction controls,even as many companies in the sector continue to believe that Beijing will be forced to loosen policy soon to avoid asharp downturn. Prices in the 70 cities that the government tracks seem to be falling only slightly, with the largestyear-over-year drop for February coming in Wenzhou, at 8 percent; but less than half of the cities (a total of 27) sawprice declines from a year before. A fallout in the real estate market remains the largest material domestic risk to theeconomy in 2012, but allowing the bubble to re-inflate may further destabilize longer-term economic growth.Ultimately, the government acknowledges that it must transition from the short-term fixes currently in place to a

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