Research Dept. News
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Monthly Report, num 357 - May 2012
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International review - China
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China: a slowdown of little concern
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China moderates its advance with 8.1% growth year-on-year in the first quarter of 2012.
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The GDP of the world's second economy grew by 8.1% year-on-year in the first quarter of the year, less than the 8.9% of the previous quarter and consensus forecasts. The moderation in foreign demand due to the weakness of advanced economies, particularly Europe, is the main reason for this slowdown in China. In particular, exports grew by a very moderate 7.7% year-on-year in current terms in the first quarter of 2012, compared with 14.3% in the last quarter of 2011.
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Nevertheless, our main scenario is still of a soft landing for China. The trajectory of domestic demand will allow it to maintain a high growth rate, with an advance of close to 8% in 2012, although there is the risk this might be lower. A greater slowdown than expected in Europe (the destination of 21% of the goods exported) would have a significant impact on the country's rate of growth.
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The rise in industrial production and retail sales in the month of March reinforces our scenario of a soft landing. Industrial production grew by 11.9% in March, higher than the 11.4% of the first two months. Retail sales were up 15.2% year-on-year in current terms, also higher than the 14.8% two-monthly figure. On the other hand, fixed capital investment grew by 20.9% in the first three months of the year, 0.6 points below the cumulative figure up to February.
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Industrial production and retail sales push forward in March.
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Although it is still too early to make any definitive judgement, the trends in these activity indicators, together with the decline in the foreign sector, are a small sign, albeit welcome, that the Chinese economy might be rebalancing its growth pattern towards private consumption and away from exports and infrastructure investment.
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Within this context of moderating activity, March's inflation rose to 3.6%, slightly above February's figure of 3.2%, due to volatile food prices, which make up more than a third of the general price index. Nonetheless, this figure is below the 4% target set by the government and is expected to continue easing throughout the year. This has allowed monetary policy to be relaxed. At the beginning of year, the reserve ratio was lowered and we expect interest rates to be reduced by 50 basis points throughout 2012, which will boost growth in credit and domestic demand. Fiscal policy will continue to be active along the same line of supporting growth. The economy's moderate debt, even taking into account the debt of local governments, should help to reinforce the network of social benefits and continue with an acceptable level of investment in infrastructures.
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The central bank widens the daily renminbi trading band against the dollar.
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Lastly, in mid-April, the central bank widened the daily renminbi trading band allowed against the dollar from ±0.5% to ±1%. However, given the slowdown in foreign demand, we do not expect the rate of appreciation of the Chinese currency against the dollar to exceed 3% in 2012.
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In short, and in spite of a possible greater deterioration in advanced economies, China's slight moderation does not seem alarming and, moreover, some indicators seem to point to a shift towards a greater role being played by private consumption. We will have to wait and see how these indicators develop over the next few months.
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