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A string of weak economic data has brought back talks of a Chinese hard landing. But in a new note to clients Ting Lu, China economist for Bank of America-Merrill Lynch says “China might be bottoming out from the unlucky Jan-Feb”.
Lu the #1 China economist according to Bloomberg says in the first two months, the Chinese economy was hit by weaker external demand, its coldest winter in 27 years, political tensions that distracted from the economy, and destocking by manufacturers following declining home sales in the last quarter of 2011. But he thinks the worst may bet over:
“The inevitable fight for political succession was finished ahead of schedule. The situation is turned for the better, and the leadership change will be even smoother, we believe. Top leaders, both outgoing and incoming, will refocus on delivering stable growth. Winter is gone finally; banks are cutting their exorbitant lending rates; new home sales rebounded as mortgage rates for first home buyers were slashed; daily steel output reached new record high as destocking is close to its end. Last but not the least, with the 2nd round LTRO, at least there is no imminent risk of another global financial crisis, in our view.”
While others like Morgan Stanley’s Joachim Fels have revised up their GDP forecasts to 9 per cent for 2012, Lu maintains his annual forecast for 8.6 per cent because he doesn’t expect Beijing to “overly stimulate the economy”. He argues that China already is a major consumer of big commodities and faster growth will only raise the costs of raw material imports and consequently inflation.
Going forward Lu sees some positive data coming out of China:
- He raises his manufacturing PMI forecast to 51 in March, from previous projections of 50.7.
- Industrial production is expected to climbed to 11.8 per cent YoY, from 11.4 per cent in Jan-Feb
- CPI is expected to be 3.4 per cent YoY slightly higher than the previous month, but lower than the 3.9 per cent average in January and February. PPI meanwhile is expected to fall modestly to -0.1 per cent YoY. On a month-over-month basis PPI could rise because of high oil and commodity prices.
- While fixed asset investment (FAI) growth is expected to hold steady, Lu says Jan-Feb data was probably driven bu social housing and overstate by local governments to report good numbers at the start of the year. So the more “real” numbers in March reflect an acceleration and the FAI growth could boost demand for construction materials like steel and cement.
- Retail sales should tick higher to 14.9 per cent YoY in March, from 14.7 per cent the previous month.
- New loans could rise to 800 billion renminbi in March, from 711 billion renminbi in February and 738 billion renminbi in January. The pick-up in new loans could come from the late-Feb RRR cut. Mortgage loans could rebound because of easier policy and loan demand could improve as manufacturers’ business returns after the Chinese New Year. Finally, because budgets will be approved after the National People’s Congress (NPC) meeting.
- Finally, trade deficit is likely to fall sharply to $900 million in March, from $31.5 billion in February.