Phat dragon

13 April 2012

# 103a

a weekly chronicle of the Chinese economy

Phat Dragons forecast - put forward with the usual amount of

trepidation and a lavish helping of caveats - wasnt too far from the money in the end. The economy reportedly expanded 8.1% from a year ago in Q1 (consensus 8.4%, Phat Dragon 8.2%, lower bound of the credible forecast range 7%) down from 8.9% in Q4 and 9.7% at this time in 2011. The slowdown in real GDP is significantly milder than that observed across a broad range of other indicators of activity, but a volume deceleration of 1.8ppt over a year is certainly not a trivial one. In nominal terms the scale of deceleration is much larger, reflecting the disinflationary state imposed by the austere policy environment through 2011. Nominal GDP reportedly expanded by 11.2%yr in Q1, a steep decline from 16.6% in Q4 and 17.5% a year ago. The implicit price deflator is now just 3.1%yr, having been as high as 9% just two quarters ago. A sharp downward move in the fixed investment deflator (from 5.7% in Q4 to just 2.3% in Q1) was a key contributor there. In the quarter itself, the NBS estimates that the seasonal adjusted growth rate was 1.8%. Phat Dragon has historically tended to be dismissive of these estimates. Some things never change.
16 14 12 10 8

Chinese GDP & the money supply

%yr
Sources: Westpac Economics, CEIC

%yr

30

GDP (lhs) M2 (rhs)

25

20

15

6 10 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

Various measures of inflation

15 10 5 0
Fixed investment price index

%yr
Sources: CEIC, Westpac Economics.

%yr

15 10 5 0

On the broadest sectoral basis, Phat Dragon notes that primary,

secondary and tertiary activity are all now expanding at single digit paces. That was the case for five quarters beginning in Q3 of 2008 and it was the norm for the bulk of the Asian Crisis-banking crisis-tech wreck phase either side of the turn of the millennium. Otherwise, it just hasnt happened. While one can certainly argue that the slowdown is not deep it is certainly broad.

-5

Consumer price index GDP implicit price deflator

-5 -10

As noted above, the deflator for capex slowed quite abruptly in

Producer price index

Q1. Phat Dragon puts real fixed investment at 18.8%yr in March, against a nominal pace of 21.1%. The nominal value of projects under the auspices of local government have slowed from above 30% last November to 23% in March while central projects remain in negative growth territory. In terms of sectoral trends, manufacturing slowed, utilities firmed and transport narrowed the rate of contraction carried from last year. Residential real estate slowed, with the nominal ytd rate below 20% for the first time since December 2009. The volume of construction starts are now contracting year-over-year (4%), joining sales (13%), while completions are up (rhetorical pause) 32%.

-10 Mar-04Mar-05Mar-06Mar-07Mar-08Mar-09Mar-10Mar-11Mar-12

Key indicators: pace of slowdown easing

30 25 20 15 10 5 0 -5 -10 -15
Sources: Westpac, CEIC. All indicators in volume terms except for imports and exports, which are nominal USDs.

%yr
Dec-10 Dec-11

%yr

30 25 20 15 10 5 0 -5 -10 -15

Industrial production was basically steady at 11.9%yr in March,

while Phat Dragons core index is showing signs of consolidating in the mid to high single digit range, with a 5.8% outcome across Q1. Steel, energy and cement volumes have steadied around 7-8%. Automobile output is bouncing around in the low single digits while sales are basically flat in terms of unit growth, while the annualised level of sales is around 17 million, which is a touch below the average of 2011H2. Retail sales, a series that does not have Phat Dragons seal of approval, came in at 14.8%ytd, a moderate firming from February. Given that food prices accelerated in March, it is safe enough to allocate the gain to a nominal effect on the price of staples, rather than a discretionary rise in spending.
Economic Research

Real GDP Core IVA

Steel

Cement

Exports

Imports

Real fixed Housing Auto sales investment sales

The overall picture is of an economy that is in need of a more

accommodative policy stance - the new evidence in favour of Phat Dragon expounded in this mornings chronicle.

Stats of the week: The share of Chinas oil imports coming

from Africa rose by 23ppts in the ten years from 1995.
www.westpac.com.au economics@westpac.com.au

Westpac Institutional Banking Group

Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at date above. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Westpacs financial services guide can be obtained by calling 132 032, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is registered in England as a branch (branch number BR000106) and is authorised and regulated by The Financial Services Authority. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised and regulated by The Financial Services Authority. Westpac operates in the United States of America as a federally chartered branch, regulated by the Office of the Controller of the Currency and is not affiliated with either: (i) a broker dealer registered with the US Securities Exchange Commission; or (ii) a Futures Commission Merchant registered with the US Commodity Futures Trading Commission. If you wish to be removed from our e-mail, fax or mailing list please send an e-mail to economics@westpac.com.au or fax us on +61 2 8254 6934 or write to Westpac Economics at Level 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number and company details on all correspondence. 2012 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.