Growth May Revive in Mid-2016
We expect growth to be low but stable, with the already-loose monetary and fiscal policy leading to strengthening. We therefore foresee a growth rebound in mid-2016. Meanwhile, GDP growth and fixed asset investment both fell in Q3, and producer prices fell further, continuing to deflate. GDP was up 6.9% y/y in Q3, down 0.1 pps from Q2. Industrial output was up 5.9%, down 0.4 pps. Fixed asset investment was up 6.8% y/y in September, and up 8.7% y/y in Q3. Quarterly growth has fallen below 10%.
Retail sales of consumer goods were up 10.7% in nominal terms, up just 0.5 pps from Q2. The trade surplus reached a record high in Q3, of $163.6 billion, with imports falling more than exports. Exports fell -5.9% y/y, and imports fell -14.4%. But we expect export growth to turn positive in November.
The CPI was up 1.6% y/y in September, and down 0.4 pps from August. The ex-factory price index of industrial products in September fell -5.9% y/y, and PPI fell -6.8% y/y, the largest decreases since the downturn. National fiscal revenue and expenditure increased 7.6% and 16.4% in the year to September, up 1 pp and 3.2 pps, respectively, from H1.
China on October 23rd announced its sixth interest rate cut in less than a year. The one-year lending rate will fall to 4.35% from 4.6%, while the one-year deposit rate will fall to 1.5% from 1.75%. Reserve requirements for all banks were lowered by 50 bps. M1 has risen quickly for the past three months, and was up 11.4% y/y in September.
Parliament in August approved a cabinet plan to cap local government debt at 16 trillion yuan ($2.5 trillion) this year, up just 3.9% from 2014. But the most important message to take away from this news is that local government debts will be more formalized, and carefully supervised by the central government. Local debt owed to the Bank will be swapped for government bonds. Even at 15.4 trillion yuan in 2014, government debt was a modest 24% of GDP. With more formalization and legalization of local debt, local government debt risk to the system will fall significantly.
FX reserves are declining fast, from their peak of $4 trillion in June 2014 to $3.5 trillion now. Though that trend has drawn much international attention, we view capital flight worries as overstated. Euro and yen depreciations have lowered FX reserves. The capital account is still open, in a limited way. And the reserve is any case often decried as excessively high. Though capital outflows might be due to yuan depreciation expectations, we expect depreciation to be minor and short term. The government recently set up an experimental “individuals QDII program” in six major cities, to allow Chinese individuals (not just institutions) to make foreign currency-denominated investments overseas. Although policies are encouraging capital outflows, these are still within a comfortable range.
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