Photo: Dennis Wong on flickr
After some disappointing data out of China, talks of a Chinese hard landing are back full force.But there’s one economic indicator that Chinese hard/soft/bumpy landing watchers should be looking at according to Societe General analyst Wei Yao.
Wei says import data, which is subject to less statistical adjustments and can be easily cross-checked with its trading partners, is a crucial indicator because China’s “import demand centres on investments”. And remember Chinese imports grew just 0.3 per cent last month.
Wei says the weak import data trend has been around since the start of the year and shows that the deceleration is happening in real terms as well. :
“There is also an argument that China’s import deceleration was largely driven by export weakness. Looking at the type of imports, we noticed that imports of raw materials and other ordinary goods each contributed to the slowdown (at least) as much as imports for processing trade did. The deceleration in real import growth has a substantial domestic component.
China’s waning demand for non-commodity ordinary imports is particularly bad news for capital goods exporters like Korea and Taiwan. Their exports both surprised on the low side in April, with demand from China either flat or contracting. However, there is a big amount of trade due to supply chain integration, and so it is still hard to tell how much of the negative news was exactly because of China’s domestic demand.
As for raw materials, situations differed widely from one commodity to another in yoy growth rates (see table below). Copper import growth looked amazingly resilient on the books, but it was mostly because of the low import volume in H1 2011 when Chinese companies shied away from high copper prices. In addition, China’s copper imports are increasingly used as collateral for corporate financing and tend to pick up during monetary policy tightening. Even so, in level terms, copper imports were flat at best between Q4 2012 and April 2012. Therefore, we think steel and iron ore better reflect the strength of China’s investment demand, which is evidently weak at the moment.”
Wei says irrespective of the type of landing it is clear that China’s investment growth will be much slower at the end of the decade, which points to a significant shift in its import structure.
What to expect in coming months
China’s central bank cut its RRR rate and Wei thinks it is likely to continue managing the slowdown along with Chinese authorities. Wei says she expects the government to take action in three area:
- Push infrastructure investment
- Soften the property tightening policy by possibly providing support for first time home-buyers.
- Possible tariff cuts and a consumption stimulus package by the ministry of commerce.
After weak April trade data SocGen revised down its Q2 GDP growth from 7.8 per cent, to 7.6 per cent, and the full-year GDP growth down to 7.9 per cent, from 8.1 per cent. For now, she is watching to see if her call for a bumpy landing turns into a hard one.
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