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Danielson, Viktor [Sec Div]
EM Macro Daily - China: A new intra-year cycle in the Chinese economy?
12 March 2014 20:53:56
Goldman Sachs Global
Macro Research
Emerging Markets : EM Macro Daily - China: A new intra-year cycle
in the Chinese economy?
by Yu Song
Published March 13, 2014
Focus: A new intra-year cycle in the Chinese economy?
Bottom line: There appears to be a new pattern emerging in the Chinese economy in recent
years with sequential growth often reaching a trough in April-July, then recovering in the
second half of the year before it fades again. We look at the possible reasons behind this
pattern and assess the likelihood of it being repeated this year.
There appears to be an intra-year cyclical pattern emerging in China, whereas IP growth
often troughs in April-July of a year, then recovers sometime in the second half of the year
before fading again around year-end.
Exhibit1: Sequential IP growth tends to be relatively slow around the middle of the
year, followed by a rebound in 2H
Source: CEIC, Goldman Sachs Global Investment Research
Apart from the role of coincidence in a small sample, we believe this pattern could be driven
by two factors:
(1)The global cycle has shown a similar pattern (with slowing growth in 1H) in recent years
(see Global Economics Weekly: ‘Groundhog data’: Why have seasonal swings been so
strong?, January 23, 2013) As we noted in our daily (see Asia Economics Analyst: China:
Less decoupling, more synchronization with the global economy, November 15, 2013), there
has been a growing pattern of greater synchronization between China’s cyclical growth and
that of the rest of the world in recent years. This greater synchronization is being reflected as
both a closer fit in terms of correlation, as well as less lead and lag time, between the GLI and
China IP (the two are mostly coincident indicators of each other now, though the GLI is
released several days earlier than China IP data).
Exhibit 2: Close correlation between China and global growth in recent years
(except mid-2013)
Note this is cumulative qoq growth, which tends to lag mom data. Therefore, the intra-year
pattern looks different from Exhibit 1. Source: CEIC, Goldman Sachs Global Investment
We believe the increased synchronization reflects:
(a) Chinese policy makers' apparent increasing reluctance to change cyclical demand
management tools as aggressively as before; and (b) China’s growing importance in the
global economy. The first factor implies that even when policies are being loosened, it will
tend to be done more cautiously, which reduces the likelihood of scenarios such as the past
Rmb 4 trillion stimulus package (which we think was a key factor that had allowed China to
weather the global financial crisis much better than most other countries). The latter factor
implies that whatever happens to the Chinese economy will have an increasingly bigger
influence on other countries too, whereas before it was more of a one-way relationship.
Exhibit 1 shows the close correlation between China’s IP and the GLI in qoq terms.
(2) Special features in China's data and policy calendar.
In the past, the rebound in IP growth in 2H often seemed to happen after policy was loosened
between July and September of a given year. The reason for this is that, although there are
often signs of economic slowdown earlier in the year, the data tends to be noisy such that
policy makers would then wait for further data to confirm the slowdown. Apart from the wellknown Chinese New Year distortions, another source of data noise is the March real
economic activity data, which has tended to be relatively strong in recent years. This implies
that policy makers may choose to wait for further data, if 1Q data as a whole was weak but
yet there were signs of a rebound in March. Thus, this often, but not always, led to decisions
only being reached in July once 2Q data becomes available. However, sometimes the
leadership can make a decision earlier as well. Last year, for example, policy makers were
starting to talk about policy initiatives as early as late June. One factor that can affect their
decision is if there are clear signs that the yoy GDP growth target is at risk of being missed.
In 2Q 2013 and 3Q 2012, we believe this factor played a role (GDP growth targets for both
years were 7.5%). 2Q 2013 yoy GDP growth came in at 7.5% and 3Q2012 was 7.4%. Prior to
2014, the GDP target had been more of a lower bound than an actual target. Besides,
although the annual GDP target is an official benchmark goal, operationally it was treated as
a lower bound guideline for quarterly yoy GDP growth rate targets too.
Policy loosening often involves the government's financial support in areas directly under its
control. For example, infrastructure building is often facilitated by the loosening of liquidity
supply. However, this loosening is typically not kept over time. In recent years, as it became
clear that economic growth had rebounded, the government then reversed its loosening
initiatives. This strategy is often described as “squeezing the toothpaste”, a Chinese
expression meaning just enough to get by, but no more. This is contrary to the period
immediately after the global financial crisis, when China saw substantial monetary policy
loosening—which was only halted when there were signs of overheating in the economy. This
change in policy bias could be driven by concerns in society that past policy stimuli were too
aggressive and rushed (we don't necessarily agree with many of these views). As a result, we
believe policy makers are now more likely to resume a tightening bias after seeing clear
signals of stronger growth.
Exhibit 3: Sequential M2 growth often accelerates in the 2H on the back of policy
Note that circles in the exhibit represent the trough in sequential IP in the year which corresponds to
the positions in Exhibit 1. Source: CEIC, Goldman Sachs Global Investment Research
One additional recent factor that we think contributes to the seasonal pattern is the
government's anti-corruption campaign, which has been putting significant pressure on
China’s domestic demand growth (see EM Macro Daily: China: Cleaner and (probably) slower
growth in China, February 3, 2014). We think the impact of the campaign had been felt most
strongly in the early part of each year, which is why we think the economy slowed in the
earlier part of last year. This was also the only time that saw a significant divergence between
the GLI and China’s IP growth in recent years. 1Q has historically been the time when
consumption activities are the most intense in a given year (similar to the Christmas season in
the Western economies). In addition, fixed asset investment activities are often planned
financially on a calendar-year basis in China, which means changes often occur at the start of
the year. On top of that, 2Q is typically the time when many construction projects resume,
especially in Northern China. The anti-corruption campaign was initiated in late 2012, though
its impact only started being felt in early 2013 while it picked up strength in late 2013. We
think its effects may become more visible in early 2014.
How about this year?
There have been increasing signs that China's economic growth has been slowing since
4Q2013. We believe there are risks that growth is slow enough to test the official target level
of 7.5% in 1Q, despite a low base. If growth does slow to 7.5% or below in 1Q, there will be
significant risks of not hitting the annual target (even possibly the 7.2% interpretation made by
the hawkish Finance Minister Lou Jiwei) because the base for 2H will be much higher.
We believe heightened anti-corruption initiatives, a tight monetary policy stance, and weakerthan-expected external demand contributed to the recent economic weakness.
We expect the anti-corruption campaign to continue to put pressure on domestic demand
growth but not likely to intensify from here. As a result, we see less of a drag from this, which
paves the way for steadier sequential growth. However, this scenario is what we and most
market observers have assumed since last year, though we point out that the actual
implementation of the campaign was not as steady as expected last year. So we cannot rule
out the risk that any anti-corruption campaign effects could pick up again in the future.
Our Economics team expects global demand to become slightly weaker on a sequential basis
in 2Q, driven especially by Japan. After that, our team expects sequential growth in the rest of
the world to pick up in 2H, which could also imply stronger export growth by China as well.
There are already signs of a less stringent policy stance in China with interest and exchange
rates falling and credit controls becoming less tight, amid increasing signs of slower growth
and falling inflation. This possible change in stance (we await for further data points before
this can be confirmed) appears to have occurred at the start of the year, which we think may
provide some support for activity growth albeit with a short lag. We believe the current
magnitude of monetary policy loosening is not yet sufficient to generate a significant rebound
in the economy without the help from stronger external demand. Should growth slow further,
more loosening (likely still very measured) is a realistic possibility, in our view.
These potential measures can include support in areas such as infrastructure construction.
However, there are no signs yet that the government is ready to deploy them, especially
before 1Q data becomes available in April. Even if policy makers view the growth slowdown
as excessive, there are still some issues to address: the 3rd Plenum stated that markets
should be playing the deterministic role in resource allocation. This could make it more difficult
to roll out certain policy initiatives as before because they may conceptually contradict the
goal. The NDRC, in particular, has shifted its primary focus from cyclical management and
project approval to reducing its administrative controls. We do not think this implies that there
is nothing the government can do—as support for urban development, railway construction
and energy infrastructure projects are still realistic options—but it does imply more constraints
on what and how much the government can do compared with the past.
The other issue with implementing policy loosening is that policy makers do not want to be
seen by the public as implementing "stimulus" plans. We believe this could be why the PBOC
has appeared cautious in its policy directives in recent weeks, despite actions that appear to
have toned down from its prior hawkish stance. This is also why we believe a RRR cut is
much more unlikely than other tools such as open market operations, even if more liquidity
supply is needed (which we do not think to be the case at the moment) because it would send
a very strong signal of monetary loosening. We think the clarity of a policy signal can affect
how impactful it becomes. The kind of policy changes we think could happen this year will
likely be more limited in magnitude and less clear in direction.
Overall, we believe the Chinese economy may well have already reached its trough this year,
though 2Q growth may remain on the weak side. We think there is likely to be a more
meaningful sequential rebound in the second half of the year on the back of potential pick-up
in global growth and policy initiatives. We estimate annual GDP growth for 2014 is still likely
to be close to the government's 7.5% target.
Yu Song
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