China is orchestrating its own balancing act
as debate continues whether the lowered GDP target of 7.5 percent for 2012,
announced at the recent National Party Congress, was bad news (weaker global
growth contribution from China) or good news (giving China more flexibility in
shifting policy focus towards stimulating domestic demand and “redistributing”
wealth across social strata).
If the
former is true then at least China has some weapons in its arsenal to attempt
to combat falling growth – Reserve Ratio Requirement (RRR) and interest rate
cuts to name a couple, though a stubborn inflation rate may stand in the way.
Any easing moves are likely to focus on reserve ratio cuts rather than direct
interest rate cuts, simply because that was the tool squeezed the most in the
latest tightening phase (+600bp between January 2010 and June 2011). However,
RRR only attempts to address supply side issues of lending, customers of
counterparties still need to step up to the plate and actually want to borrow
money (property developers and speculators are still shackled by restrictive
anti-speculative measures in that sector, reaffirmed by Premier Wen in his NPC
speech that house prices remain at “unreasonable levels” despite recent falls
in house prices). So does this mean we reignite demand for infrastructure
projects and the like? Regardless, we expect possibly two moves in the RRR by
mid-year.
Stimulating
domestic demand will still remain a longer-term goal as authorities attempt to
shift a well-ingrained, traditional mindset of save, save, save. Affordability
of healthcare remains an issue and is one of the reasons behind the saving
mentality. Premier Wen’s aim to “vigorously adjust income distribution,
increase the incomes of low and middle-income groups and thus enhance people’s
ability to consume” will assuredly be a long-term plan and it is doubtful that
we will see progress before he steps down and passes the reins to his successor
early next year.
With
the new official growth target reduced to 7.5 percent for this year (and
coincidentally our forecast for 2012), what if the unthinkable happens and
growth even misses these lowered targets? 7.5 percent is viewed as the bare
minimum the economy needs to achieve in order to stand still and, as minimum
targets have been achieved readily over recent decades, what are the chances of
an equivalent recession? Small, in our opinion. At the first hint of drama,
China can still pull something out of the hat near-term – drastic rate cuts,
more stimulus and public spending
(sounds more like the developed world!) and at least postpone the unthinkable
for another year. Meanwhile, we await the fruits of the puppeteer’s
re-balancing efforts.
Andrew
Robinson
tradingfloor.com
See the
entire Saxo Bank Q2 2012 Outlook report in PDF
version.
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