You can always tell when Wall St is set on a rally by the way its media interprets data. Last Night’s Bloomberg story on imminent Chinese stimulus is classic case in point:
U.S. stocks rose, sending the Standard & Poor’s 500 Index toward the highest level since July, as slowing Chinese growth added to speculation that monetary policy at the world’s second-largest economy will ease.
…“The Chinese have demonstrated that they are more proactive at when to tighten and when to ease,” David Sowerby, a Bloomfield Hills, Michigan-based portfolio manager at Loomis Sayles & Co., which oversees $150 billion, said in a telephone interview. “This is a period of significant central bank liquidity. The expectation is for some easing,” he said. “In the U.S., the economic news has improved.”
Stocks joined a global rally as China’s growth slowed after Europe’s debt crisis curbed export demand and the property market weakened, sustaining pressure on Premier Wen Jiabao to ease monetary policy. Spanish borrowing costs plunged at an auction as investors ignored S&P downgrades last week. Manufacturing in the New York region grew in January at the fastest pace in nine months.
Equity bullishness aside, yesterday’s Chinese numbers seem to have confused pretty much everyone. My initial reaction was incredulity at the 8.9% YOY print. I neglected to note that quarterly growth was only an 8% pace and clearly declining. I had expected something in the mid to high sevens so it was not as far wide of the mark as I supposed.
Moreover, let’s face it, the worst is very unlikely to be over. House prices have only just rolled over and with manufacturing production under pressure from an internal heavy industry slowdown tied to housing sloth as well external pressure in the form of the European recession, the PMI seems likely to remain subdued (the flash is out Friday). According to Standard and Chartered via Alphaville, a lot of other indicators are saying the same thing:
At times of stress, we know that China’s GDP numbers can appear a little weird. In late 2008, we recommended a number of growth proxies to watch in case the GDP numbers became less reliable, including electricity production, freight traffic, and production of key industrial goods.
All of these proxies suggested a deeper downturn in late 2008 and early 2009 than the official GDP numbers showed. In this note, we check in on those proxies, and they suggest that the economy is indeed continuing to expand, albeit at a more moderate pace than in 2011.
The note goes on:
The correction has begun. Residential housing investment hit a 30-month low of 10.8% y/y in December (19.6% y/y in Q4), compared to 35.7% in the first three quarters of 2011. Floor space under construction fell 25% y/y in December (Chart 8 shows the 3-month moving average, which softens the decline); this suggests that investment in this sector has much further to contract. Sales volumes declined substantially in Q4. Residential floor space sold fell 8.4% y/y in December (following average growth of 12.9% in Q3-2011). Completed residential floor space is still growing, up 9.3% y/y in December. This is resulting in rising apartment inventories.
Expectations of price rises in Tier 1-3 cities appear to be reversing, and developers have been cutting prices since October in an attempt to shift inventory. Prices will likely continue to fall. In Q2-2012, we expect the central government to begin signalling a policy shift to stabilise the sector. At the March National People’s Congress meetings, local officials will be lobbying aggressively for relief. Once prices have come down, we expect Beijing to start gradually easing some of the property market restrictions imposed in the past year in order to encourage first-time buyers into the market. This sector, though, remains the biggest risk to China’s economy.
The FT points out as well that China officialdom is also downbeat:
But at a press conference held to unveil the latest figures, the spokesman for China’s National Bureau of Statistics expressed official concerns that things are likely to get worse in the coming months.
“In terms of the domestic and international situation 2012 will be a year of complexity and challenges so we should be fully prepared,” said NBS spokesman Ma Jiantang in a speech laced with words like “gloomy”, “complicated” and “severe”.
And that 7% may be the new 8%:
In comments reported last week, Yu Yongding, an influential academic economist and adviser to the government, said GDP growth of between 7 and 8 per cent would be acceptable in China, but a drop below 7 per cent would signal an economic crisis, or even a political crisis.
“The authorities are clearly still trying to navigate between the twin dangers of overstimulating the economy again and causing the current slowdown to sharpen dangerously,” said Stephen Green, an economist at Standard Chartered. “Many officials are of the view that the economy needs to be deleveraged and China needs to get used to a slower growth rate.”
Back to Alphaville and another excellent post pares back the expectation for stimulus. Several analysts are as skeptical as I am about the role of property:
From JPMorgan’s Jing Ulrich:
Having already loosened credit restrictions for SMEs, on November 31, China cut RRR by 50 basis points to 21% for commercial banks and 19% for small and medium sized banks. This cut was not intended to relieve pressure in the property space, with central government officials making clear that they intend to maintain tight policy restrictions on the sector.
From SocGen’s Wei Yao (our emphasis):
As we expected, property sector data headed further south. Total December property sales contracted 6.7% yoy in volume and 1.3% yoy in value. Total investment in this sector grew 12.3% yoy, compared to 20% yoy in November and 27.9% in 2011 – most troubling, new property starts declined 18.9% yoy and new residential starts dropped 24.8% yoy in December. Unsold units jumped 26.1% in 2011, 18ppt faster than that in 2010. A large inventory and tight liquidity led developers to drag the pace of construction, with project completion decelerating to 8.9% yoy in December from an average of 36.4 in the last three months. The tension in the property sector almost reached the level in late 2008, and we expect more headwinds in H1 2012. It is not a cheerful picture.
As I’ve pointed out a number of times, Chinese authorities have made it a political point of honour that they will bring property prices back to affordable ranges (perhaps we should import them). So, any stimulus measure will have necessarily to work around this goal. That is still possible given China’s loan quota system which can target specific sectors, but the inhibition presented by property is one the main reasons why I see Chinese growth in the 7%+ range for the year. The only way I see house price stimulus happening is in the event that the price correction turns unruly. A risk.
The optimists seem to believe that the leadership transition scheduled for late this year means all tough choices will be palmed off to the next generation of leaders. But that is not what the evidence says and it seems to me at least equally plausible that Hu and Wen might want to take some tough choices so that the new leadership starts with a clean slate. If they put the Party ahead of themselves, like any good apparatchik should, then why not?
In sum, yesterday’s growth number was not as strong as it appeared at first blush, nor is it likely to bring forward stimulus in a hurry and, when it does come, the effects will be considerably less spectacular than 2009.
