Chinese economic activities continue to lose momentum. Fixed investment, industrial production, retail sales and new loan growth all slowed in October, confirming our expectation that domestic demand will continue to decelerate. Short-term data for China continue to head downwards, confirming our view that domestic demand is slowing, although GDP growth will still be close to the official 7.5% target this year.
Non-performing loans surged 10% last quarter, the most since 2005, and soured loans may rise further as real estate prices slump and the economy slows. The PBoC’s cash injections into selected banks failed to spur a pickup in lending. Aggregate financing in October was CN¥662.7 billion, down from CN¥1.05 trillion in September. New yuan loans were CN¥548.3 billion, down from CN¥857.2 billion, official data show. The China Banking Regulatory Commission said non-performing loans rose CN¥72.5 billion in the 3Q from the previous three months to CN¥766.9 billion. Up to the end of June 2013, the governments at the provincial, municipal and county levels had their debt balance at CN¥10,578.905 billion, an increase of CN¥3,867.954 billion as compared with the figure at the year end of 2010, with an annual average increase of 19.97%. The increases at the provincial, municipal and county levels were 14.41%, 17.36% and 26.59%, respectively. China’s central administration will impose hard caps on local government borrowing, its boldest move yet to control financial risks from an explosive rise in regional debt. That combined with a similar jump in corporate debt, helped push China’s overall debt-to-GDP ratio to 261% in June this year, up from 148% in 2008. However, resolving the bad debt problem is eventually likely to require more extensive intervention by the government. It should be added that these debt problems aren't the same as in the West as these companies are all not only owned but also backed by either local governments or the national government, meaning that the state is ultimately responsible for the debt.
China's NDRC has reaffirmed a stance of using large-scale projects to stabilise growth and promote structural adjustment in the economy. The NDRC strongly affirmed that it will push forward such projects in the areas of network development, including information technology and energy networks, health and elderly-care facilities, environmental protection, clean energy, water supply and conservation in agriculture, transportation, and mineral and energy resource production. The NDRC also announced cancellation of the need for central approval on projects related to metals, cement, and fertilisers production, among others. The comments from the NDRC are in line with historic experience and current expectations that authorities will launch shovel-ready projects as growth sags. Evidence is ample of that approach in the past, as well as this year.
In October, the NDRC approved 21 transportation infrastructure projects worth CN¥693 billion ($113 billion). Year-to-date, government investment in all forms of infrastructure has grown 22.6%, roughly steady from previous years, while investment in railways has accelerated by over 14 percentage points during the 3Q to 23.5% growth in October.
The PBoC reduced its benchmark interest rates for the first time since June 2012, indicating that weakening growth has tipped decision-making towards an accommodative stance from a strongly prudent one earlier this year. On 21 November, the PBoC announced that benchmark interest rates for one-year loans would be lowered the next day – 22 November – by 40 basis points to 5.6%, and that benchmark one-year deposit rates would be lowered 25 basis points to 2.75%. Notably, an easing of the deposit rate ceiling to 1.2 from a prior 1.1 multiple of benchmark rates means the change is neutral, with banks still able to pay up to 3.3% on deposits. The change in interest rates may moderately stimulate the economy; but alone it is unlikely to fuel a sustained acceleration. The interest rate cut is the PBoC’s first move since July 2012. The rate cut appears justified, given the weak growth momentum and low inflation environment. It seems this situation is signalling a policy shift toward more aggressive monetary easing. The latest rate cut could also be a response to the spectre of potentially weaker-than-expected economic activity in 4Q.
Price growth remains weak in China even as the government steps up targeted efforts to support the economy, highlighting the depth of heavy industrial overcapacity and the impact of low global oil prices. According to data issued yesterday (10 November) by the National Bureau of Statistics, China’s CPI expanded by only 1.6% y-o-y in October, steady with readings a month prior. The producer price index (PPI) contracted by 2.2%, a steeper decline than the 1.8% contraction in September. Month-on-month CPI was flat, its slowest monthly gain in four months, while m-o-m PPI was steady at 0.4%. It seems the largest factor in the further weakening of the PPI in October was lower energy costs. The PPI within the petroleum and natural gas sector was -8.2% y-o-y, its lowest reading since June 2013 and representing a large downward shift from 3.1% growth in August. Aside from the recent change in oil prices, old stalwarts continue to lead industrial deflation, including mining and quarrying, raw materials and non-ferrous metals. While lower price growth could provide more space for policy easing, rhetoric from central leaders indicate broad monetary easing remains unlikely. An active fiscal policy will continue to be used to stoke demand for some employment intensive sectors while short duration liquidity injections may be used to ease financial sector strains. Weaker energy prices should also support stronger margins for some sectors, which may stimulate additional output without government intervention.
Chinese export growth slowed from a 19-month high in October, although it remained relatively buoyant. According to data issued by China's General Administration of Customs, on 8 November exports grew by 11.6% y-o-y in October, down from a blistering fast 15.3% in September.
Imports growth also moderated to 4.6% from 7.0% a month prior. Among major partners, moderately slower growth was most apparent in Hong Kong, which slowed from 34% to 24%, and the EU, which slowed from 14.9% to 4.1%. Hong Kong and the EU together account for just under half of China's nominal exports.
During October, China's trade surplus was $45.4 billion, compared to $31 billion a year prior. In October, China's various purchasing managers' indices all showed weakening export orders to varying degrees, indicating that external demand would soften in the 4Q after playing an instrumental role in sustain growth during the 3Q. While China's monthly trade surplus remains high, y-o-y gains have weakened relative to early in the 3Q. During July and August China's trade surplus was an average of $25 billion higher in levels than a year prior, while that narrowed to a $15.1 billion average gain in September and October.
Housing prices across major Chinese cities contracted at a slower pace in October compared to September, corroborating reports throughout October that sales volumes were improving to their highest weekly levels in months. According to data issued by the National Bureau of Statistics, in October prices in 69 of 70 cities declined m-o-m, the same as the previous month. In y-o-y terms, prices declined in 67 cities, compared to 58 in the previous month. Many headlines will obsess with deepening y-o-y declines, but those merely describe the cumulative impact of pricing over the last 12 months, rather than the current month and will almost certainly decline for at least one more quarter.
In terms of business activity, it seems inflationary pressures are forecast to ease further, although with both goods producers and service providers predicting a slower rate of input and output price inflation. A number of companies expect commodity prices, particularly for oil, to remain at relatively low levels in the year ahead due to expectations of softer global demand.
Manufacturing sentiments softened in November due to weakening external demand, consistent with other signs that Chinese growth remains shaky during the 4Q. According to data issued by the National Bureau of Statistics of China on 1 December, China's manufacturing PMI in November fell to 50.3 from 50.8 the previous month. While nearly every sub-index declined, by far the largest retreat was in new export orders, which fell from 49.9 to 48.4. Also notable is that output fell to 52.5 from 53.1, while total new orders shrank to 50.9 from 51.6. The China manufacturing HSBC PMI fell to a six-month low of 50 in the final reading for November, down from 50.4 in October and unchanged from the flash reading. Domestic demand expanded at a sluggish pace while new export order growth eased to a five-month low. Disinflationary pressures remain strong while the labour market weakened further. The data shows that the manufacturing sector lost momentum and point to weaker economic activity in November. The PBoC's rate cuts will help to stabilise property and manufacturing investment in the coming months. Further monetary and fiscal easing measures are still expected to offset downside risks to growth.
The GDP expected growth for 2014 remains unchanged at 7.4%. The expectation for 2015 is 7.2% but a further weakening in manufacturing sentiments is yet another sign that the risk remains primarily on the downside for the remainder of the 4Q. Net exports played an outsized role in growth during the 3Q and were it not for China's trade surge during that period, real growth would have slipped below 7%.