Over-Tightened Policies Constrain Growth

CHINA - Report 31 Oct 2014 by FAN Gang and HE Liping

Executive Summary

Though GDP grew 7.3% y/y in Q3, down just 0.2 pps from Q2, principal economic indicators suggested that the true situation might be worse.

Industrial output rose 8% y/y, down 0.9 pps from Q2. Fixed asset investment increased 14.4% y/y, down 2.8 pps, to a record low. Retail sales of consumer goods rose 11.9% y/y in nominal terms, down 0.4 pps from Q2. Exports rose 12.9%, up 8 pps. Imports were quite stable, up 1.3% y/y.

CPI rose 1.6% y/y in September, its slowest rate since 2011. The ex-factory price index of industrial products in September fell -1.8% y/y, and PPI fell -1.9% y/y, down 0.6 and 0.5 pps respectively from August.

Monetary policy tightened further. M2 at the end of September rose 12.9% y/y; M1 rose 4.8% y/y; and M0 rose 4.2% y/y. Those figures all represented slowdowns. In Q3, the societal financing scale dropped significantly, epecially in July (-66.6%), August (-39%) and (September -25.1% y/y).

The People’s Bank of China announced on September 30th that home buyers who had paid off their previous mortgages could buy houses with lower down payments, of 30%. Over the past few days, the State Development and Reform Commission awarded many licenses to large infrastructure construction projects. For example, after giving licenses to three major construction projects on October 16th, the agency on October 22nd again gave licenses to eight more construction projects, worth 245.8 billion Chinese yuan in total.
We can view the above actions as steps to easing macroeconomic policies, though the overall policy is still over-tightened, evident in such measures as the high reserve requirement ratio (still over 20%) and interest rate (at a 3% as base rate), strict housing purchase restrictions, and lower state investment due to anti-corruption. With deflation pressure (PPI has been negative for 32 months), we expect government to announce more easing policies to bring the over-tightened policies back to normal (from stimulation). Due to lagged policy effect, our projection falls between the government’s 7.5% yearly growth target and the projection of our pessimistic peers: we project the annual growth rate at 7.4%.

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