Last Monday marked the beginning of the Chinese New Year. Those for whom 2012 holds special significance were born under the sign of the dragon and are said to be passionate, brave and good with money. All qualities the policymakers at the PBoC will have to possess if they are to steer the country through the choppy economic waters that lie ahead.
Indications suggest that China’s breathless economic growth is set to abate in 2012. The slowdown will be the result of two factors – the problems that have beset the peripheral debt in the Eurozone (the country’s biggest export market) and a down turn in domestic demand as monetary policy has been tightened in light of ballooning house prices. This was confirmed by a recent report produced by analysts at J.P. Morgan, China.
It predicts growth will slow to 8.4% in 2012, down from 9.2% in 2011 (see chart, below). The report also suggests that the first two quarters of the year will be particularly sluggish, registering growth figures of 7.2% in Q1 and 7.8% q/q saar in Q2. As a result, inflationary pressure is expected to ease in the second half of the year, which in turn will force policy makers to switch their focus from inflation to growth.
If these predictions prove correct, it will mean the country experiences its slowest rate of growth since the final quarter of 2008. As for inflation, the consensus among those watching the Chinese market is that the CPI will fall from 5.4% in 2011 to somewhere in the region of 3% this year (see chart), causing interest rates to tumble as a consequence.
Lending
With growth set to slow over the next twelve months, the government is expected to boost demand by cutting taxes and splashing out on capital projects and social welfare programmes. It will also seek to release some of the pent up liquidity in the banking sector by slashing the banks’ reserve requirement ratio, thereby making it easier for corporates to find funding.
Indeed, analysts at J.P. Morgan predict China’s RRR will be cut four times over the next twelve months; the bulk of the cuts are expected to fall in the first half of the year. The report says it expects this to free up liquidity and to bolster loan creation, which the analysis suggests will reach RMB 8.2 trillion this year. On the other hand, looser monetary policy and a lowering of the RRR by up to 200 bps in total, which some analysts expect, will mean that deposit rates and repo rates will fall, meaning that corporates will have to be more judicious when it comes to investing cash short-term.
Home and away
On the export side, problems in the Eurozone have given rise to uncertainty among producers in China. In particular, the bloc’s sovereign debt woes and their implications for global financial markets will continue to be a major headache for China-based exporters. Indeed, the most recent data showed that China’s exports to the EU fell 21.9% 3m/3m, saar in December 2011.
“The export sector continues to face uncertainties associated with the evolvement of the euro area sovereign debt crisis. We expect net exports to become a drag on growth, subtracting 1.0%-pt from 2012 headline GDP growth. For domestic demand, we expect a steady consumption trend, along with some moderate slowing in fixed investment growth,” says J.P. Morgan.
On the domestic front, the slowdown in the housing market and attendant decline in house prices, an outcome the authorities’ tightening measures hoped to bring about, is likely to speed up over the next quarter. This may increase the downside risk on the macro economy associated with a sharp correction, but the government is expected to offset some of this with domestic capital projects.
RMB
Meanwhile, the internationalisation of the RMB is set to continue. At the end of last year, new rules opened up the capital account further when the government allowed financial account transactions to be settled in the national currency. This trend is expected to continue this year, with the domestic bond and equity markets to be opened up further to foreign investors and issuers.
