Slowdown Against Government Target
Executive Summary
People’s Bank of China Governor Xiaochuan Zhou announced in a March 11th press conference that deposit interest rates would likely be “liberalized” in one or two years. Four days later, the Bank announced on its website that the daily trading band for the RMB would broaden to 2%, from 1%, starting on March 17th.
Government targeted GDP to grow 7.5% this year. However, relatively tight monetary policy has begun to slow the economy. Economic activity indicators were declining in January and February, and growth rates for industrial output, consumption, real estate sales and CPI inflation were all falling.
Industrial output rose 8.6% y/y in January and February, down 1.4 pps from Q4 2013. Such a low growth rate has rarely been seen over the past 14 years. Under the current tight monetary policy, this trend will be hard to reverse. Fixed asset investment increased 17.9% y/y in real terms, down 1.7 pps from December.
Retail sales of consumer goods rose 11.8% y/y, down 1.7 pps from Q4. CPI rose 2.2% y/y, its lowest level since last year. In February, the ex-factory price index of industrial products fell -2% y/y, and PPI fell -2.1% y/y, both down 0.6 pps from Q3.
Though exports fell 1.8% y/y in January-February, the actual growth rate was much higher, in our analysis. We expect exports to grow robustly this year. Imports rose 10% y/y.
M2 increased 13.3% y/y in February, down 0.3 pps from the end of last year. Especially given the recent statements and actions at the Central Bank, it’s possible that monetary policy won’t be kept this tight in the future, given slowdown, and the fact that low inflation has already been achieved.
The government is moving to regulate shadow banking. Prime Minister Keqiang Li stated in a March 13th press conference that the government had already developed a timeline to strengthen regulation, after the State Council’s release of shadow banking regulation document No. 107. Although shadow banking has grown fast, its size relative to GDP is still significantly smaller than it is in the United States. Early awareness of potential risks, coupled with financial regulation, will contain financial risks. We argue that prudential regulation is necessary in order for the Chinese economy to enjoy sustained growth.
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