Research Blog
China: The darkness before dawn?
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Mingchun Sun
(852) 2773 8751
mingchun.sun@hk.daiwacm.com
Kevin Lai
(852) 2848 4926
kevin.lai@hk.daiwacm.com
Fei Xue
(852) 2773 8767
fei.xue@hk.daiwacm.com
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21 December 2011
The slowdown in the Chinese economy appears to be continuing and becoming ever more widespread. The official manufacturing PMI fell to 49.0 in November, indicating the first month-on-month contraction in industrial activity since the Lehman crisis. Meanwhile, the property market is deteriorating quickly. The volume of property sales fell by 1.7% YoY in November after dropping 9.9% YoY in October. Out of the 70 cities that NBS tracks, 49 cities recorded month-on-month declines in residential property prices in November. Due in large part to funding constraints, property investment has now been falling for four consecutive months. And as a result of slowing property investment growth, as well as weak infrastructure investment, total fixed asset investment (FAI) growth fell below its 12-month average for the first time in 14 months.
The breadth of the slowdown is reflected in our Daiwa China Momentum Gauge (DCMG), which tracks 20 economic indicators and counts the number of them exceeding their 12-month moving averages. This dropped from 4 to 3 in the latest reporting period (mostly for November), the lowest level in three years. Out of the 20 indicators, 17 softened in the latest period (compared with 14 in the previous period).
Daiwa China Momentum Gauge
Source: CEIC and Daiwa
The decline in the DCMG should not come as a surprise as the positive impact of recent policy loosening is unlikely to show up in activity for a while yet. The good news, however, is that we should see signs of that happening by the second quarter of 2012. Indeed, the OECD composite leading indicator (CLI) for China, which has proved a good predictor of IP growth with a 5-6 months lead, rose for the second consecutive month in October. If the predictor proves accurate, IP growth should stabilize and then rebound in the spring of 2012.
OECD leading indicator for China and IP growth
Source: CEIC and Daiwa
In our view, the surprising 50bp cut in the reserve requirement ratio (RRR) on 30 November has opened the gate for more policy loosening. However, due to the time lag between policy loosening and its impact on the real economy, we expect economic indicators to continue their downtrend over the coming few months. Against that seemingly downbeat outlook for the start of the New Year, therefore, the stabilization of the OECD CLI for China provides some encouragement.
Economic indicators for China
Highlighted rows show indicators where latest reading above 12-month moving average. Source: CEIC & Daiwa Capital Markets
Mingchun Sun, Chief Economist, Asia, ex-Japan
Kevin Lai, Senior Economist, Asia, ex-Japan
Fei Xue, Economist, Asia, ex-Japan
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